How The New Communication Services Sector Could Look

Earlier this month, index giants Standard & Poor's and MSCI Inc. confirmed the expansion and renaming of the telecommunications sector to "Communication Services" in an effort “to include companies that facilitate communication and offer related content and information through various media,” according to a statement.

The new look communication services sectors will feature some existing members of the telecom sector as well as new additions, primarily media stocks, that currently reside in the consumer discretionary sector and exchange traded funds such as the Consumer Discretionary Select Sector SPDR XLY.

XLY, the largest ETF dedicated to the consumer discretionary sector, allocates 22.5 percent of its weight to media stocks, the ETF's second-largest industry weight behind internet retail. Comcast Corp. CMCSA, Walt Disney Co. DIS and Time Warner Corp. TWC are the media stocks found among XLY's top 10 holdings.

A New Look

The telecommunications sector is a scant percentage of the S&P 500. The sector is just 1.9 percent of the S&P 500's weight, the smallest of the 11 sectors tracked by the benchmark U.S. equity gauge.

“The new Communication Services Sector will include the existing telecommunication services companies (as an industry group), but also aims to reflect the integration of telecom, media and select internet companies, leading to an additional industry group called Media & Entertainment,” said S&P Dow Jones Indices. “The companies that facilitate communication and offer related content and information through various mediums will be considered in the new sector.” 

While the telecom sector is home to just three S&P 500 members, the new communication services sector could add as many 16 S&P 500 stocks.

Speculating On The Additions

While the index providers have not announced the media stocks that will leave XLY for the communication services sector, some market observers believe that group is likely to include Comcast, Time Warner and CBS Inc. CBS. The good news is the new communication services is likely to be a far better bet than the old telecom sector.

“In every time period measured annualized over one, three, five and 10 years, the new Communication Services Sector outperformed the Telecommunication Services Sector,” said S&P Dow Jones. “Not only did it outperform, but the risk was also reduced over every time period, with the exception of the 10-year annualized risk for the large cap sector. The added volatility comes from the relatively large weight and volatility from the S&P 500 Internet Software & Services Sub-Industry that overpowers the moderately low correlation.”

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