What is a communications industry ETF?
A communications industry ETF is a exchange traded fund (ETF) which invests in securities specializing in communication to generate returns equal to an underlying index.
Previously, communications industry ETFs were restricted to telecom sector – one of the smallest sector weightings in the S&P 500 dominated by Verizon Communications Inc. (VZ) and AT&T Inc. (J). Then, in 2018, a change was made to broaden their reach, reflecting the growing role that media and internet companies are playing in communication.
Key points to remember
- A communications industry ETF is an exchange-traded fund that invests in securities specializing in communications, including telecommunications, media and internet companies.
- Its objective is to generate returns equal to an underlying index.
- In 2018, the GICS has decided to reclassify many Internet technology platforms as communications.
- These changes mean that communications ETFs now exhibit more growth-oriented characteristics than before – telecommunications are generally much more defensive.
Understanding Communications Industry ETFs
ETFs are a collection of securities similar to mutual fund, many of which track an underlying index. However, unlike mutual funds, they are publicly traded and trade throughout the day just like common stocks.
Some ETFs seek to replicate the broader market. Others focus on stocks and securities in a specific sector, following sectors through the Global industry classification standards (GICS) benchmark indices. As a new sector, communications services doesn’t have many ETFs — only nine communications ETFs are currently available to investors, according to etfdb.com.
Previously, most ETFs in this category held large stakes in telecommunications behemoths AT&T and Verizon Communications, with additional holdings then varying widely. As of 2018, it is more common to find large FAANG Shares constituting a large part of these wallets.
Important:
The GICS’ decision to reclassify many technology internet platforms as communications means that many ETFs in the communications sector now hold a high proportion of FAANG shares.
Changes to GICS, a system widely used to categorize stocks, have resulted in communications ETFs now featuring more growth oriented characteristics than in the past – previously these ETFs reflected defensive characteristics of telecommunications companies.
History of communication industry ETFs
Standard & Poor’s (S&P) and Morgan Stanley Capital International (MSCI), two of the largest providers of indices for ETF issuers, are dividing the United States and the world stock markets in various industrial sectors based on the GICS. In 2018, the GICS was expanded in a move that saw the declining telecommunications services industry become part of a wider communications services industry.
The GICS noted the changing definition of communications as part of the growing integration between telecommunications, media and internet companies. Merger and acquisition (M&A) in these industries has facilitated the bundling of cable, Internet and telephone services, as well as the integration of distribution with programming content. The emerging dominance of social media companies as primary providers of communication services, increasingly via mobile platforms, has also driven these industry shifts.
The renamed sector now includes existing telecommunications companies, as well as companies selected from the consumer discretionary sector previously classified in the media industry group and the Internet retail and direct marketing sub-industry, as well as some companies previously belonging to the information technology sector.
Example of a communication industry ETF
According to etfdb.com, the largest ETF in the communications sector is the Vanguard Communication Services ETF (VOX) with approximately $2.72 billion in assets under management (AT M). This particular vehicle aims to replicate the performance of the MSCI US Investable Market Communication Services 25/50 Index. When this is not possible, due to regulatory constraints, the fund uses a sampling strategy to approximate the main characteristics of the index.
At the end of 2020, VOX’s portfolio consisted of 113 stocks with an average market capitalization of $229.9 billion. Its main holdings were Alphabet Inc. (GOOGL), Meta (META), formerly Facebook, and Walt Disney Co. (SAY).
Advantages and disadvantages of communication industry ETFs
ETFs in the communications sector generally offer investors the same benefits as traditional exchange-traded funds, including low expense ratios, decent liquidity, and tax efficiency. They are traded on most major exchanges during normal trading hours and support sell short Where buy on margin.
Diversified exposure
Diversification is also a key attraction. Investors looking to gain broad exposure to domestic or international communications stocks might consider ETFs targeting the sector. Communications ETFs provide immediate exposure to a diverse selection of communications companies, helping investors reduce business-specific risk.
Communications ETFs are a diverse group of funds, invested in overlapping but not unified groups of stocks and other securities. On the one hand, these vehicles do not offer much to investors in terms of diversification and risk mitigation because they are focused on one industry.
On the other hand, one could argue that they tick those boxes because they allow investors to invest in a basket of companies, rather than just one or a small handful.
It should also be noted that the communication services sector is much larger than before, giving access to a variety of titles with completely different profiles, and is constantly evolving. In theory, investing in one of these vehicles gives investors the opportunity to combine the growth prospects of technology stocks with the high dividend yields and relatively stable cash flow typical of defensive telecoms.
FAANG Heavy
Although they encompass a wide range of stocks, there is a risk that many communications sector ETF portfolios are more heavily weighted to large-cap FAANG stocks. These companies tend to attract high valuationsmeaning even the slightest setback can trigger a sell-off, and they’re already a staple in most portfolios.