Best ETFs for 2020: The Communication Services SPDR ETF Can Rally in Q4

XLC is still in the best ETFs camp because it has multiple tailwinds for success in Q4 and beyond.

This article is a part of InvestorPlace.com’s Best ETFs for 2020 contest. Todd Shriber’s pick for the contest is the Communication Services SPDR Fund (NYSEARCA:XLC).

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The Communication Services SPDR Fund (NYSEARCA:XLC) posted a solid performance in the third quarter, gaining 7.50% despite a rough September in which it slid 6.70%. XLC entered October with a year-to-date gain of almost 11%.

While that’s not enough to credibly position XLC to win our Best ETFs for 2020 contest, the near- and long-term cases for the largest communication services exchange-traded fund remain intact. And the fourth quarter could be an ideal time to revisit this sector.

As I’ve noted over the course of 2020, Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are the primary drivers of XLC’s price action because that duo combines for 45% of the fund’s roster.

And as is often the case, Alphabet and Facebook find themselves in political crosshairs. Joining the group is XLC component Twitter (NYSE:TWTR). Here’s an abridged version of the political landscape these companies face. They’ve made no efforts to quell overt left-leaning biases nor have they reduced targeting of speech that runs counter to that view. In turn, these companies have drawn the ire of elected Republicans.

However, the issue is even thornier because, in the case of Alphabet and Facebook, they essentially function as monopolies. In turn, they also draw concern from Democrats about media domination. In other words, there’s bipartisan support to put these titans of Silicon Valley on the hot seat.

XLC Remains One of the Best ETFs

Political headwinds are nothing new for the aforementioned XLC components and those scenarios usually weigh on the stocks briefly before giving way to more upside. As it is, Facebook is up almost 28% this year, indicating Capitol Hill conjecture isn’t a long-term threat to the name.

Data confirm professional investors agree as that crowd recently reduced exposure to other sectors, but boosted allocations to communication services equities. Another potential political plus for XLC is the likelihood of former Vice President Joe Biden winning presidency in November. His running mate, Kamala Harris (D-CA), is from Northern California and plenty of Silicon Valley firms, including some XLC components, backed her attorney general and Senate campaigns. That stokes thought that a Biden Administration won’t look to take a heavy-handed approach to dealing with Facebook and Google.

Putting politics aside, there are other reasons XLC is still in the best ETFs camp. Foremost is communication services’ status as a growth sector. The gap valuation gap between growth and value is as wide as it has ever been, but that’s not compelling investors to embrace the former. Nor is it discouraging them from embracing growth fare. Second, the U.S. economy is currently in low growth mode. In those environments, growth stocks historically outperform, underscoring a strong near- to medium-term case for XLC.

Other Positive Factors

Down 14.21% year-to-date and fresh off announcing a staggering number of layoffs, Disney (NYSE:DIS) is a clear drag on XLC this year. If the company could cobble together good news on box office sales or the reopening of Disneyland in California, there could be momentum for this name as a 2021 rebound play.

That’s asking a lot, but it doesn’t mean XLC lacks for tailwinds. Electronic Arts (NASDAQ:EA) and Activision-Blizzard (NASDAQ:ATVI) are two components that can provide more fuel to the fund’s fire.

Obviously, the looming holiday shopping season should be of some assistance to video game equities, but this could be bigger because new hardware — the PlayStation 5 and the Xbox Series X — are launching and gamers need new games to go along with new consoles.

Bottom line: Alphabet and Facebook will navigate Capitol Hill with minimal detriment to investors and XLC’s other smaller components can offset lingering weakness in Disney. If Mickey gets his act together, that’d be a bonus though not a necessity for XLC investors.

On the date of publication, Todd Shriber owns shares of XLC.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/10/best-etfs-for-2020-the-communication-services-spdr-etf-can-rally-in-q4/.

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