With so much excitement around artificial intelligence, this year’s stock market story has been all about technology. But not every tech fund has tech in the name.
Take a look at the $19 billion Communications Services Select Sector SPDR exchange-traded fund, the best performing member of the popular family of sector ETFs, which together contain all the companies in the S&P 500. The fund is up 17% year to date, just beating the 15.6% gain in the far more popular $70 billion
ETF.
There are two main dynamics at play. One is Internal Revenue Service diversification rules that until recently limited the tech sector fund’s stake in Nvidia, putting a drag on its performance. But the other reason has to do with the communication services fund itself, which is a lot more techy than its name implies.
In fact, the communications fund’s top holding is
which makes up 22% of its portfolio, followed by the two share classes of
Alphabet
.
They are listed separately, but together account for 23%. About 4.5% of the fund is invested in the videogame maker
and a similar amount is in
Netflix
.
Of course, the ETF also has significant investments in telecommunications companies such as AT&T, Verizon Communications, and
T-Mobile
,
as well as traditional media brands like
Warners Brothers, and Barron’s parent, News Corp.
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All the same, it isn’t hard to see the Communications Services ETF as basically a tech fund.
FactSet
,
which uses a different industry classification system than the one employed by the fund itself, classifies 63% of the fund’s holdings as technology services companies. It labels most of the rest as communications or consumer services.
So why put Meta, Alphabet and other companies in a communications sector ETF instead of the tech fund where they might seem to belong.
The decision dates to a 2018 revision of the Global Industry Classification Standards, a widely used market taxonomy overseen by S&P Dow Jones Indices and MSCI. The stocks were shifted from the tech and consumer discretionary sectors into what had been a shrinking stand-alone telecom sector.
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“With the number of telecom companies shrinking, it is clear that communications is much bigger than telecom,” explained S&P Dow Jones Indices at the time. “Communication Services includes any content delivered on networks. The old Telecommunications Sector was vanishing because it was missing new and popular ways people communicate now.”
Whatever the index managers’ motivations, the decision was likely good for most ETF investors. As mentioned above, this year’s huge run-up in tech stocks has already created some diversification issues for the Technology Sector SPDR, which already represents more than one-third of the stock market. IRS rules say individual positions exceeding 5% of fund assets can’t make up more than 50% of holdings. That has meant that at various times this year, it has been obliged to underweight either
or
Apple
.
If the fund contained additional megacap stocks, it might be even less likely to be able to hold enough of those shares to reflect their weightings in the S&P 500.
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It all underscores an investing lesson. There’s more to picking an ETF or mutual fund than checking the name and the fees.
Write to Ian Salisbury at [email protected]
