Communication Services Makes Its Presence Felt

The communication services sector, which officially launched last September, is cementing its status as an important piece of broad market indexes such as the S&P 500.

Communication services, which combines old guard telecommunications stocks with companies that previously resided in the consumer discretionary and technology sectors, represented 10.18 percent of the SPDR S&P 500 ETF SPY as of Jan. 24. That makes communication services the S&P 500's fourth-largest sector weight.

What Happened

The Communication Services Select Sector SPDR XLC is the oldest and largest exchange traded fund dedicated to the sector. XLC launched last June, meaning it was tested during the bear market in the fourth quarter. Data indicate the fund was less bad than some competing sector funds during that bear market.

“Through Dec. 24, 2018, the S&P 500 Information Technology lost 23.1%, the S&P 500 Consumer Discretionary lost 22.0% and the S&P 500 Communication Services lost 17.8%,” said S&P Dow Jones Indices Managing Director Jodie Gunzberg in a recent note. “Of the three sectors, only the communication services sector avoided a bear market and outperformed the S&P 500.”

Why It's Important

Knowing that communication services is an important sector weight in the S&P 500 is one thing. Knowing what stocks drive XLC and rival ETFs is important as well. With $3.85 billion in assets under management, XLC is quickly becoming one of the ETF bellwethers for beloved growth stocks such as Alphabet Inc. GOOG, Facebook Inc. FB and Netflix, Inc. NFLX. Combined, those stocks represent about 45 percent of XLC's roster.

The communication services sector has also been steady during the broader market's rebound off the December lows.

“While the rebound has not been big enough to recoup all the losses in these sectors, overall the communication services held up best from Sep. 24, 2018 – Jan. 23, 2019,” said Gunzberg. “Over the period, the S&P 500 Communication Services lost 7.5% as compared to the S&P 500 Information Technology that lost 14.0% and the  S&P 500 Consumer Discretionary that lost 10.1%.”

With investors pouring into XLC, the fund is up about 8 percent to start 2019.

What's Next

For now, communication services appears firm in its status as a top-five sector weight in the S&P 500. A modest decline could take the group to the fifth spot, but the sector's market value would need to jump more than 30 percent and be accompanied by declines in the financial services sector to see communication services jump to the third spot in the S&P 500.

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