The Communication Services SPDR Fund (NYSEARCA:XLC) probably won’t catch some of the leading contenders, such as cloud computing and innovative technology funds, in the 2020 edition of the Best ETFs Contest, but give XLC some credit, as it has recaptured nearly all of its March losses. In fact, as of June 25, it resides just 5.51% below its record high.
A second-quarter gain of almost 30% fueled in large part by internet behemoths Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is helping the exchange-traded fund climb out of the hole caused by the novel coronavirus earlier in the year. XLC allocates more than 45% of its weight to those three securities, so saying they’re important to XLC’s fortunes is an understatement.
Facebook retured almost 50% in the April through June period, which was a boon for XLC. This is particularly important because the social media giant is once again the center of political controversy. Politicians aren’t just concerned about the monopoly-esque status enjoyed by Facebook (Alphabet is part of this conversation, too), but also the company’s perceived political leanings.
Alphabet and Facebook traversed political waters before and with polls suggesting the occupying party of the White House and Senate majority will flip come November, analysts aren’t shying away from upgrading the two internet giants.
The recent resurgence in coronavirus cases can affect XLC in either direction. Getting the fund’s vulnerabilities out of the way first, Disney (NYSE:DIS) is a top 10 XLC holding, accounting for 4.32% of the ETF’s weight.
Disney is modestly higher over the past week, but there’s headline risk here, including the delayed reopening of Disneyland in California. Florida, home to Disney World, is also experiencing a surge in coronavirus cases. The Sunshine State is loathe to implement another shutdown, but Disney can do that on its own and it would likely hamper to stock. None of that includes potential delays to the restarts of the NBA and NHL seasons or the possibility that either college football and the NFL won’t start on time this year — all scenarios that would weight on Disney’s ESPN unit.
In better news, XLC is also uniquely positioned to withstand another shutdown and not simply because folks will be killing time Googling stuff or posting on Facebook. In lieu of a proper streaming entertainment ETF, XLC is an adequate proxy with robust exposure to Netflix (NASDAQ:NFLX), among other streaming stocks. Put simply, Netflix is one of the best-performing S&P 500 stocks this year and shelter-in-place directives are a big reason why that’s the case.
Likewise, video game stocks are on a roll this year, ranking as the other segment — in addition to streaming — that’s benefiting from stay-at-home policies. Even if another shutdown doesn’t come to pass, XLC’s video game exposure is meaningful because it’s derived via game publishers. With a console upgrade cycle coming later this year, gamers will want new software to test out the new hardware and that could be catalyst for several XLC components like Electronic Arts (NASDAQ:EA) and Activision-Blizzard (NASDAQ:ATVI).
The Bottom Line on XLC as One of the Best ETFs
As noted above, XLC is behind some of the other competitors in the Best ETFs fray, but that’s not a reason to dump or ignore the fund.
Alphabet and Facebook sport pristine balance sheets, sit on mounds of cash and are proving largely immune to political pressure. Additionally, the fund’s exposure to the disruption offered by the gaming and streaming industries is compelling for long-term investors that don’t want to stock pick in those arenas.
That is to say, with few exceptions, XLC’s holdings are mostly growth stocks and growth is on a multi-year run of crushing value.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of XLC.