Market Overview

Looking At The Newest S&P 500 Sector One Year Later

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Looking At The Newest S&P 500 Sector One Year Later

The communication services sector — the refreshed, growthier version of the old telecom sector — recently celebrated its first anniversary.

It's been an eventful year for related exchange traded funds such as the Communication Services Select Sector SPDR (NYSE: XLC).

What Happened

XLC, which follows the Communication Services Select Sector Index, debuted in June 2018 prior to the launch of the sector itself. Today, the first ETF dedicated to the communication services sector has $5.92 billion in assets under management.

XLC is a combination of old school telecom names such as AT&T (NYSE: T) and Verizon (NYSE: VZ) and companies that previously resided in the consumer discretionary and technology sector.

Familiar names that made the move from those sectors to XLC and rival funds include Facebook (NASDAQ: FB), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Netflix (NASDAQ: NFLX) and Walt Disney (NYSE: DIS).

In fact, XLC allocates almost 42% of its combined weight to Facebook and the two share classes of Alphabet stock.

Why It's Important

“After this change, the average constituent volatility of Communication Services has been higher than that of the old Telecommunication Services,” S&P Dow Jones Indices said in a recent note.

“Some investors might therefore assume that the volatility of the new index is also higher than that of its predecessor, but this is paradoxically not the case.”

The 19.25% average volatility in the communication services sector over the last year is only slightly higher than the 17.65% average volatility of telecommunication services, S&P Dow Jones said — and at a time when the overall S&P was "much more volatile," the firm said. 

“As predicted, Communication Services has higher average dispersion and much lower correlations than did Telecommunication Services.”

What's Next

Going forward, investor may expect that XLC acts more like the broader market, as communication services is no longer a bond-like proxy like the old telecom group.

“Telecommunication Services had a high exposure to dividend yield and value. In stark contrast, Communication Services tilts away from dividend yield and low volatility, as well as away from small size, and is relatively more exposed to momentum and high beta” said S&P Dow Jones.

“As a result, the sector now behaves more like the market.”

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