As markets toss and turn, long-term investors realign their portfolios.
Rather than fearing volatility, they use it to their advantage.
And one rather remarkable sector stood out this week in our TrackstarIQ Data – communications.
Although search results amongst institutional advisors for the SPDR Communication Services Select Sector (XLC) came in at number 13, it’s notable as it hadn’t ranked in the top 50 for weeks.
You might bet that telecommunication companies like AT&T (T) and Verizon (VZ) are the biggest holdings.
You’d have lost that bet.
In fact, half the holdings are just two companies – Facebook (FB) and Google (GOOGL).
Considering how off most of our guesses were, we wanted to clue you into three ETFs that covered the spectrum to give you and your clients some options.
Communication Services Select Sector SPDR Fund XLC
Let’s start with the hottest search right now.
The XLC invests in companies from telecom to media. That’s why you see both AT&T and Activision Blizzard (ATVI) in their holdings.
As one of the SPDR funds, the expense ratio is a paltry 0.12% and you even get a small dividend yield of 0.6%. Plus, liquidity is high with nearly 4 million shares traded daily.
The one caution is this ETF only holds 27 positions with several very concentrated (something you’ll see across all these ETFs).
iShares U.S. Telecommunications ETF IYZ
The IYZ covers the more traditional elements of the telecommunications world with holdings like Verizon, AT&T, T-Mobile, and the like.
Investors pick up companies like these for their stability in price and dividend payouts.
To give you an idea, the IYZ had a total trading range of $20-$37 over the last 10 years.
Right now it pays a healthy dividend yield of 2.54%, though it’s crested 5% at times.
However, the expense ratio runs a bit hot at 0.42% and liquidity is fairly low with only 200,000 shares traded daily on a $34 stock.
But, if you can pick up shares on major pullbacks, the reinvested dividends for retirees can provide a healthy return over the long run.
Direxion Work From Home ETF WFH
This odd duck fits into the communication theme by investing in businesses that connect and enable remote workers.
With a new twist on a growing trend, the ETF holds companies like Proofpoint (PFPT), Adobe (ADBE), and Fortinet (FTNT) which span the range of work-related software to cybersecurity.
For such a niche ETF, the expense ratio at 0.45% isn’t too shabby. However, the daily volume is anemic at around 10,000 shares, so you may need a few days to build a position of any size.
Our hot take
Today’s ETFs redefine what communication services mean.
We’re no longer looking at just telecoms (although you can). Instead, we get a broader set of companies that enable communication.
Questions from your clients
- Do telecom companies often trade in the same direction as treasury bonds?
- Is there a way to avoid too much tech exposure with these ETFs?
- How are the dividends treated from a tax perspective?
- Do ETFs with lower AUMs carry additional risks?