A Decent Outlook For This Facebook-Heavy ETF

The Communication Services Select Sector SPDR XLC, the first and largest exchange traded fund dedicated to the communication service sector, is often known for its massive combined weight to Facebook Inc FB and Alphabet Inc GOOG.

Those stock combine for over 42% of the fund's weight and as such, chart the course for XLC, but some analysts believe some other components in the benchmark communication services fund could help drive the fund higher this year.

Those names include Walt Disney Co DIS, Netflix, Inc. NFLX and other companies with streaming exposure.

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Why It's Important

Dow component Disney is already flexing its streaming muscles and, by some estimates, has added tens of millions of subscribers to its Disney+ service in just two months.

“Among traditional media firms, the launch of Disney+ in November marked the first of several major services set to challenge the industry,” Morningstar said in a recent note. “Disney’s stock has moved up sharply in 2019 on increasing optimism concerning its ability to remain relevant with consumers regardless of how the market shifts. We’ve long believed that Disney has the strongest position of any media firm.”

Some smaller streaming players found in XLC, such as ViacomCBS Inc VIAC and AMC Entertainment AMC could lift the fund as well.

“While these companies may need to bulk up over the longer term, several, like ViacomCBS and AMC Networks, are well positioned to benefit as the big streaming platforms look for content to differentiate their offerings,” according to Morningstar.

What's Next

Contributions from smaller holdings could prove pivotal for XLC's near-term fortunes, particularly as market participants assess near-term risk-reward in Alphabet and Facebook.

“In the online world, shares of both Google and Facebook have rallied nicely since taking a beating on renewed regulatory scrutiny last spring,” notes Morningstar. “While we don’t believe regulatory pressures will meaningfully threaten either business, we view the risk and reward as well balanced for both stocks.”