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Briefing.com Summary:

*The communication services sector offers AI growth at a reasonable valuation multiple.

*XLC has superior liquidity; VOX provides broader sector diversification.

*Both ETFs reduce single-stock risk while retaining upside exposure.

The S&P 500 communication services sector has some enviable characteristics that should support its standing in this market as a primary attraction for active investors. Several factors are working in the sector's favor:

• Relative valuation
  • The sector trades at 20x forward twelve-month earnings, a 5% premium to its 10-yr average, versus the S&P 500, which trades at a 20% premium to its 10-yr average of 18.4x.
• Alphabet (GOOG/GOOGL) and Meta Platforms (META) are AI growth leaders
  • These are the sector's most heavily-weighted components
• The sector provides exposure to the AI growth trade at a reasonable price but also retains some defensive-oriented appeal in more challenging economic environments
  • The quality factor can be connected to the presence of Alphabet, Meta Platforms, Netflix (NFLX), and Walt Disney (DIS) in the space.
  • Some counter-cyclical appeal is there with the presence of AT&T (T), Verizon (VZ), and T-Mobile (TMUS), as well as Netflix, which has a utility-like draw for many consumers.

The sector is coming off a command performance in the second quarter, in which it rose 18.2%, paced by gains in Netflix (+43.6%), Meta Platforms (+28.1%), and Walt Disney (+25.6%). Alphabet did well (+13.5%), outperforming the market but still trailing its sector peers.

Some profit-taking from a short-term overbought position could pose a challenge in the near term, yet pullbacks are apt to be greeted as a buying opportunity for the reasons mentioned above. The spoiler for that approach would be fundamental growth disappointments from Alphabet and Meta Platforms, the heavyweights of the space.

Individual stock selection can come with high risk but also high reward. ETFs help mitigate the volatility of single-stock selection through the ownership of multiple securities. Today, we are highlighting two sector ETFs that provide active investors with a gateway to the communication services sector.

A Double Dose

The first selection is the largest ETF in the space. That would be the Communication Services Select Sector SPDR Fund (XLC), which tracks the S&P 500 Communication Services Select Sector.

• Top Holdings in Mega-Cap Names: Includes heavyweights like Meta Platforms (META), Alphabet (GOOG/GOOGL), and Netflix (NFLX), which together account for approximately 45% of the fund. These companies are leaders in digital advertising, search, social media, and entertainment.
• Liquidity and AUM: High average daily volume and over $24 billion in assets under management (AUM) make it easy to trade.
• Cost-Effective: Expense ratio of just 0.09%, among the lowest in sector ETFs.
• Strong Performance History: Has historically outperformed many peers due to the strength of mega-cap growth names, especially in bull markets.

The second selection is the Vanguard Communication Services ETF (VOX), which tracks the MSCI US IMI / Communication Services 25/50. Its strong suits include:

• Broad Exposure: Unlike XLC, which focuses on S&P 500 constituents and has just 25 holdings, VOX includes smaller-sized stocks alongside the mega-caps for a total of 118 holdings. The larger exposure set provides more diversification and growth optionality.
• Top Holdings Exposure: Meta Platforms (META), Alphabet (GOOGL, GOOG), and Netflix (NFLX) dominate—very similar to XLC—comprising approximately 50% of the fund, which has approximately $5.0 billion in assets under management.
• Vanguard’s Cost Efficiency: Low expense ratio of 0.09%.
• Reputable Index Construction: The use of MSCI’s broader IMI index captures more of the sector, which can appeal to longer-term investors who want a wider net.

Briefing.com Analyst Insight

Both ETFs have concentration risk at the top of their funds, making the performance of Alphabet and Meta Platforms key to returns. For active investors with a growth orientation, though, these ETFs fit that bill because the largest holdings are AI leaders.

The edge XLC has over VOX is its size and liquidity, yet VOX is the more diversified fund, investing in sector stocks that fall outside the S&P 500 Communications Services Sector. If one wants to remain concentrated in S&P 500 holdings, then XLC is the clear choice.

In any case, both XLC and VOX are appealing options in the ETF space if looking for exposure to the communication services sector without taking on individual stock risk.

--Patrick J. O'Hare, Briefing.com