Growth, internet, social media and streaming entertainment stocks haven’t been immune to the madness induced by the coronavirus from China. All of this has put considerable strain on the Communication Services SPDR Fund (NYSEARCA:XLC). But the bright side is that the XLC ETF now looks like it could be one of 2020’s more credible rebound opportunities.
Some stocks and ETFs — think airlines, energy and travel and leisure — have been rightfully punished at the hands of the COVID-19 pandemic, but XLC’s 15.47% month-to-date decline could prove to be a quintessential case of the baby being thrown out with the bath water.
As it is, XLC is outperforming the S&P 500 this month and on a year-to-date basis, potentially showing the fund and its components will take on leadership roles if and when stocks rebound.
Still a Lot to Like About XLC
In terms of acting as an investment play against the coronavirus, the $6.26 billion XLC is a mixed bag. Notable is the fact that the ETF features Netflix (NASDAQ:NFLX) as one of its top holdings (6.42% weight) and that stock has been a standout this year, jumping 12.18% as investors are embracing stay at home ideas in the face of COVID-19.
Conversely, Dow Jones components Disney (NYSE:DIS) and Verizon (NYSE:VZ) — two other big-name XLC constituents — are wilting against the coronavirus backdrop. Yes, Disney has a burgeoning streaming service, but the stock is being punished as investors ponder how long it will take for movie theater and theme park visits to return to normal after the coronavirus passes. Likewise, Verizon is betraying its defensive reputation and is merely performing less poorly than the broader market.
Now, let’s examine Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), two stocks that combine for roughly for 42% of the XLC ETF. Alphabet is outpacing the S&P 500 this year, while Facebook is slightly trailing the benchmark equity gauge. Both names are lower this year because investors are concerned about what becomes of internet advertising spending in a recession.
The concern is relevant, but reasons remain to embrace XLC’s top two holdings. One is cash, something there’s a newfound premium on the current climate. Alphabet and Facebook have cash. Lots of it.
At the end of 2019, Alphabet had $119.67 billion in cash on hand, while Facebook had $54.85 billion. In volatile times, cash can be a buffer and it’s a quality trait at a time when investors are eagerly embracing quality stocks. For those considering XLC, it’s clear the ETF is home to some cash-rich companies and none of its marquee holdings will be asking Uncle Sam for a bailout anytime soon.
Is XLC Still One of the Best ETFs for 2020?
There’s no sugarcoating the fact that XLC is off to a rough start this year, but that’s true of basically every other traditional sector ETF out there, too. And while some companies and industries are facing near zero revenue scenarios for the first quarter of this year, that’s not going to be the case for Alphabet and Facebook.
Add up the cash positions of those companies and selloffs that are likely cases of too much too fast, and there’s a recipe for XLC to perk up later this year.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.