My selection for InvestorPlace.com’s Best ETFs for 2020 contest is the Communication Services Select Sector SPDR (NYSEARCA:XLC). For the uninitiated, XLC is the first and largest exchange-traded fund dedicated to the communication services group, the most recent sector addition to the S&P 500 and other well-known equity benchmarks. That sector officially debuted in the third quarter of 2018.
XLC is currently up 28% year to date, putting it ahead of the S&P 500 by almost 100 basis points. Of the 11 sector SPDR ETFs, only the Technology Select Sector SPDR Fund (NYSEARCA:XLK) and the Financial Select Sector SPDR Fund (NYSEARCA:XLF) are outperforming XLC.
Everything You Should Know About XLC
The communication services sector and, more to the point, XLC, can continue generating upside in 2020 for multiple reasons. XLC is a cap-weighted fund, meaning the largest components by market value in the underlying sector take on the biggest weights in the ETF. Translation: Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) combine for over 43% of XLC’s roster.
So for capital-starved investors who can’t afford to build adequate stakes in those internet giants, XLC is a fund that makes a lot of sense. More importantly, XLC’s proxy-like status on Alphabet and Facebook is important because those companies control almost 60% of the global internet advertising market, a segment that prints cash at a rapid pace.
Clearly, it’s easy to view XLC as an Alphabet/Facebook alternative and nothing more, but there is much more to the fund’s story, including chapters that are relevant right now such as streaming.
Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) combine for more than 9% of XLC’s weight. Comcast Corporation (NASDAQ:CMCSA), which is also a streaming contender, is the fund’s tenth-largest component at 4.11%.
Issuer’s haven’t yet constructed a dedicated streaming ETF, but XLC and rival communication services funds are fairly close. Plus, XLC has one of the largest weights to Disney stock among all ETFs, a relevant point at a time when the mouse is clicking on all cylinders: at the box office, streaming, hawking merchandise and at its theme parks.
But There’s More to Consider
Even if an investor decides to overlook the expected uptick in television advertising spending because 2020 is an election year, a relevant point to XLC because close to 10 of the ETF’s 26 holdings stand to benefit from that trend, there’s more to like with the fund in the new year.
The “more” includes the ongoing growth of the video gaming, including e-sports segments. XLC allocates about 18% of its weight to video game publishers and that doesn’t include its exposure to new industry entrants, such as Alphabet. Nor does it include the impact of Star Wars video games and other Disney licenses on that stock.
With 5G on the horizon, cloud gaming is poised to take off and some industry observers expect 2020 will bring esports further into the mainstream.
“The advent of cloud gaming, especially when combined with the rollout of technologies such as 5G, represents more than just an opportunity for the industry — it’s a strategic imperative,” according to a study by EY. “By seizing the opportunities to adopt the latest technologies, leading companies can prevail and potentially reverse the trend of slower growth.”
Esports growth could be the cherry on the XLC sundae in 2020.
According to the EY survey, “23% anticipate it will contribute nothing toward industry revenues in the next five years, while 34% expect it to contribute up to 10%, and 43% say it will add more than 10%.”
The ETF charges an expense ratio of 0.13%, or $13 annually per $10,000 invested.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.