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ETF of the Week: Communication Services Select Sector SPDR Fund (XLC)

This article was originally published on ETFTrends.com.

ETF Trends publisher Tom Lydon discussed the  Communication Services Select Sector SPDR Fund (XLC)  on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.

XLC is the first ETF dedicated to the new communication services sector. The new ETF tracks the Communication Services Select Sector Index and “seeks to provide precise exposure to companies from the media, retailing, and software & services industries in the U.S.,” according to State Street Global Advisors (SsgA).

  • A new ETF to keep up with GICS structure reclassification
  • SPDR or spiders, known for its suite of sector-specific ETFs, launched a new “communications” sector ETF to keep up with the new GICS changes
    • new GICS changes will transform the telecommunications services sector as we know it
    • Under the new global industry classification standard (GICS), the new sector will be renamed Communication Services effective September 21, 2018 and will include select tech and consumer discretionary names.
    • The new sector will include most of the so-called FANG stocks
    • It will also be supported by the recent wave of media and television acquisitions
  • What’s going on?
    • The telecom services sector will be renamed communications services
    • The new communications sector will include facebook, Netflix, google’s alphabet, along with Amazon
    • 14 S&P 500 companies will shift from the consumer discretionary sector into the new communications sector
    • 5 S&P 500 companies will switch from technology to communications
    • The launch of XLC allows access to this new investment that will represent roughly 10% of the S&P 500 Index in terms of market capitalization.
    • XLC will include securities of companies from diversified telecommunication services; wireless telecommunication services; media; entertainment; and interactive media & services.
  • What about the other SDPR sector ETFs?
    • as the communication services sector comes to life, big changes are coming for some well-known consumer discretionary and technology exchange traded funds
      • including the Consumer Discretionary Select Sector SPDR (XLY) and the Technology Select Sector SPDR (XLK).
      • State Street will make changes to XLK and XLY’s underlying indices to reflect the new reclassified sectors effective after the close on September 21, 2018
  • As a tax-paying investor, should I be concerned if I hold these ETFs?
    • According to a State Street Global Advisors fact sheet:
      • The rebalance is not expected to result in capital gain distributions to existing shareholders of XLY and XLK
      • If there are any resulting capital gain distribution requirements, estimates will be provided in early November
    • Turnover of XLY and XLK
      • Expected one-way turnover of XLY and XLK of 24% and 26%, respectively
  • Communication Services Select Sector SPDR Fund
    • Top holdings: Facebook 20.8%, Alphabet Class C 11.7%, Alphabet Class A 11.6%, AT&T 5.0%, Charter Communications 4.8%, Netflix 4.8%, Comcast 4.7%, Verizon 4.6%, Activision Blizzard 4.6%, and Walt Disney 4.5%
    • Sub-sectors: internet software services 46.7%, media 27.1%, diversified telecom services 11.2%, software 9.6%, internet & direct marketing retail 5.4%

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