The Vanguard Communication Services ETF gives a strong signal

The Vanguard Communication Services [VOX] ETF saw a 26.9% year-to-date slump to $69.09 on 23 March as fears over the impact of Covid-19 on the global economy and society sent markets plunging. However, as people and businesses around the world turned to communications devices and services to help them through the gloom and complexities of lockdown, the VOX bounced-back.

In fact, the ETF surged to $111.18 on 2 September. But this did not last long as it dropped 11.2% to $98.76 on 24 September as fears over a second wave of the coronavirus took hold.

As of 6 November, the Vanguard Communications Services ETF has again proven its resilience, closing at $111.35 — up 17.9% for the year and 61.2% since its March low. Its year-to-date total daily return, according to Yahoo Finance, is 19.4% and it has total net assets of $2.7bn.

Communication breakdown

The Vanguard Communication Services ETF, first launched in September 2004, tracks the MSCI US Investable Market Telecommunication Services 25/50 Index. The fund has 112 holdings including stocks of companies that provide telephone, data transmission, cellular, wireless communication services and offer related content and information through various media.

Google owner Alphabet Holdings [GOOG] has the biggest weighting with 21.6%, followed by social media giant Facebook [FB] with 17.2%, telecoms group Verizon Communications [VZ] with 5.5%. NBCUniversal owner Comcast [CMCA] makes up 4.8% of the fund, while TV streaming service Netflix [NFLX] constitute 4.7% and The Walt Disney Company [DIS] 4.4%.

The recent performance of a number of these mega-caps has been good news for the ETF.

“The communications sector is feeding off the latest innovation in facilitating interaction among humans despite the challenges of Covid-19. This is fuelling communications-focused ETFs as of late,” wrote Ben Hernandez in ETF Trends.

Alphabet’s shares rocketed 66.7% from $1,056 on 23 March to $1,761.7 on 6 November as businesses snapped up services like Google Cloud as they worked remotely, and consumers played games via Google Play and watched YouTube while stuck at home.

Meanwhile, Facebook’s shares are up 101% from $146 on 16 March to $293.4 on 6 November as many people kept in touch with friends and family during lockdown via the social media service. Its Q3 revenues rose 22%, although advertising revenues have seen slower growth as businesses hold fire on their budgets in the crisis.

Verizon Communications shares have grown 17.2% from $49.94 on 25 March to $58.53 on 6 November, and with Comcast rose 37.4% from $32.42 on 1 April to $44.53. Netflix, the go-to streaming service during the crisis, surged 72.2% from $298.84 on 16 March to $514.73 on 6 November.

The Vanguard Communication Services ETF has benefited from having diverse holdings in a sector that has flourished among accelerated consumer and business trends in the pandemic.

This growth could continue if the work-from-home trend continues and more people stay at home for their entertainment, and as Businesses migrate more towards the cloud and adopt 5G digital services.

Saturated screen time

There may be some dark clouds on the horizon, however, if businesses continue to suffer in the recession and squeeze advertising budgets on social media and television spots, and if consumers get bored of their online habits through overuse.

When the global pandemic eases there may be a rush to consume outdoor or communal entertainment like cinemas again. The tech sector has also been hit by reputational damage such as that suffered by Facebook from the Cambridge Analytica scandal and the threat of anti-trust legislation, including that from the US House Judiciary Committee to control their power and encourage more competition.

However, potential gridlock in Washington could limit antitrust legislation.

“We now see a material reduction in the possibility of a meaningful overhaul to existing antitrust law,” said Evercore ISI analysts in a research note. They believe Facebook and Alphabet are “major winners on this front.”

Zacks has a medium risk outlook on the Vanguard Communication Services ETF.

But, several of the stocks in the VOX could do well in any upcoming economic downturn. “Companies like Verizon Communications keep people connected and that’s important during recessions, especially when said recession is prompted by a global pandemic,” Catherine Brock wrote in The Motley Fool,

“Sector ETFs in utilities and telecommunications may be the least interesting positions in your portfolio. But if the US economy falls deeper into recession, your dullest holdings may be the one you appreciate most,” she added.