Heavy On Alphabet And Facebook, This ETF Earns A Neutral Rating

Alphabet Inc. (GOOG) and Facebook Inc. (FB) both disappointed investors this earnings season, pressuring some exchange traded funds with large weights to the stocks.

That includes the Communication Services Select Sector SPDR (XLC).

What To Know

XLC devotes over 42 percent of its weight to Facebook and the two share classes of Alphabet stock and the ETF is lower by 1.5 percent over the past week.

Over the same period, shares of Alphabet are lower by nearly 8 percent. Earlier this week, the stock tumbled after missing revenue estimates, but Alphabet did report better-than-expected operating income. While analysts remain mostly bullish on Alphabet, some ETF analysts have more tepid views on the $5.76 billion XLC.

Why It's Important

In a note out Thursday, AltaVista Research tagged XLC with a Neutral rating. That rating implies average appreciation potential. XLC is up 20.18 percent year-to-date.

AltaVista's Neutral rating on XLC “indicates that valuations adequately reflect the fundamentals of stocks in these funds.”

It's not uncommon for AltaVista to rate a sector SPDR ETF as Neutral. The research firm rates each of the 11 sector SPRD ETFs and currently has Neutral ratings on seven of those funds, including XLC. Other marquee holdings in XLC include Dow component Walt Disney Co. (DIS) and Netflix, Inc. (NFLX).

What's Next

“Valuations have recovered from the nosedive of late last year, pushing the sector back down to Neutral territory as sales and EPS growth are forecast to slow this year,” said AltaVista. “Meanwhile Facebook and Alphabet (Google) which account for more than 40% of the fund reported disappointing 1Q19 results. Nonetheless, sell-side analyst are more bullish on the Communication Services sector than any other.”

Investors remain enthusiastic about XLC as highlighted by year-to-date inflows of $2.22 billion into the fund.

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