Communication Industry ETF

What Is a Communication Industry ETF?

A communication industry ETF is an exchange-traded fund (ETF) that invests in securities specializing in communication with the objective of generating returns equal to an underlying index.

Previously, communication industry ETFs were restricted to the telecom sector — one of the smallest sector weights in the S&P 500 dominated by the likes of Verizon Communications Inc. (VZ) and AT&T Inc. (T). Then, in 2018, a change was made to broaden their reach, reflecting the growing role that media and internet companies play in communication.

Understanding Communication Industry ETFs

ETFs are a collection of securities that track an underlying index. They are similar to mutual funds but are listed on exchanges and trade throughout the day just like ordinary stock.

Some ETFs seek to replicate the broader market. Others focus on stocks and securities of a specific industry, tracking individual sectors via the Global Industry Classification Standard’s (GICS) benchmark indices. As a new sector, communication services does not have many ETFs — only nine communication ETFs are currently available to investors, according to etfdb.com.

Previously, most ETFs in this category held large stakes in telecom juggernauts AT&T and Verizon Communications, with additional equity holdings then varying significantly. Since 2018, it is more common to find big FAANG stocks making up a large portion of these portfolios.

Important:

The GICS’ decision to reclassify many tech internet platforms as communications means that many communication industry ETFs now hold a high proportion of FAANG stocks.

Changes to the GICS, a widely-used system for categorizing stocks, have resulted in communication ETFs now featuring more growth-oriented characteristics than in the past — previously, these ETFs reflected the defensive characteristics of telecom companies.

History of Communication Industry ETFs 

The GICS took note of the evolving definition of communications amid the growing integration between telecommunications, media, and internet companies. Merger and acquisition (M&A) activity across 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 leading providers of communication services, increasingly through mobile platforms, also drove these sector changes.

The renamed sector now includes existing telecommunication companies, as well as companies selected from the consumer discretionary sector previously classified under the media industry group and the internet & direct marketing retail sub-industry, along with select companies previously belonging to the information technology sector. 

Example of a Communication Industry ETF

The biggest communication industry ETF, according to etfdb.com, is the Vanguard Communication Services ETF (VOX) with roughly $3.27 billion in assets under management (AUM). This particular vehicle seeks to track the performance of the MSCI US Investable Market Communication Services 25/50 Index. When that’s not possible, due to regulatory constraints, the fund uses a sampling strategy to approximate the index’s key characteristics.

At the end of 2020, VOX's portfolio was made up of 113 stocks with an average market capitalization of $229.9 billion. Its largest holdings were Alphabet Inc. (GOOGL), Facebook Inc. (FB), and Walt Disney Co. (DIS).

Advantages and Disadvantages of Communication Industry ETFs 

Communication industry ETFs 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 selling short or buying on margin.

Diversified Exposure

Diversification is also a key attraction. Investors desiring to gain broad exposure to domestic or international communication stocks might want to consider ETFs targeting the sector. Communication ETFs offer immediate exposure to a diverse selection of communication companies, helping investors reduce company-specific risk.

Communication ETFs are a varied group of funds, invested in overlapping but not unified groups of stocks and other securities. In one respect, these vehicles do not offer investors much in the way of diversification and risk mitigation because they are concentrated on a single industry. On the other hand, it could be argued that they do tick these boxes because they allow investors to invest in a basket of companies, rather than just one or a small handful.

It’s also worth pointing out that the communication services sector is much larger before, providing access to a variety of securities with completely different profiles, and is constantly evolving. In theory, investing in one of these vehicles gives investors the chance to mesh the growth prospects of tech stocks with the high dividend yields and relatively stable cash flows typical of defensive telecoms.

FAANG Heavy

Some caution is required, though. Despite encompassing a wide range of stocks, there is a risk that many communication industry ETF portfolios are likely to be more heavily weighted to the big market cap FAANG stocks. These companies tend to attract lofty valuations, meaning even the slightest of hiccups can trigger an aggressive sell-off, and they are already a fixture in most portfolios.