VOX - FCOM: Way Too Much Concentration Risk

2023-10-31 22:35:00 ET

Summary

• FCOM is an ETF that offers exposure to U.S. communication services stocks, but it has a concentration risk, with Meta and Alphabet accounting for 40% of the fund.
• The top ten holdings of FCOM make up approximately 69.88% of its total net assets, with Meta Platforms Inc and Alphabet Inc being the largest positions.
• FCOM faces competition from other communication services ETFs such as XLC and VOX, but it has a lower expense ratio and has performed in line with VOX.

Technology often gets most investor attention, but perhaps the time is here to focus more on the Communication Services sector instead. After all, there's clear overlap with Tech companies, and many of the stocks in the sector looks relatively attractive. The Fidelity® MSCI Communication Services Index ETF ( FCOM ) is a good proxy for the space, but it does have one very large problem that goes by the name of concentration risk.

FCOM is an Exchange Traded Fund that offers exposure to U.S. communication services stocks, tracking the MSCI USA IMI Communication Services 25/50 Index. This index is comprised of small-, mid-, and large-cap stocks from the communication services sector, as defined by the Global Industry Classification Standard (GICS®).

FCOM invests at least 80% of its assets in securities included in the MSCI USA IMI Communication Services 25/50 Index. It employs a representative sampling indexing strategy to manage the fund, and its market capitalization-weighted index captures the large-, mid-, and small-cap segments of the US market.

Top Holdings of FCOM

A critical aspect of understanding an ETF is examining its top holdings. FCOM's portfolio has over 100 stocks, with the top ten holdings accounting for approximately 69.88% of its total net assets. The top five individual positions include:

1. Meta Platforms Inc CL A (20.31%) : Known formerly as Facebook, Meta Platforms is a leading player in the interactive media and services industry. It dominates the social media landscape with platforms like Facebook, Instagram, and WhatsApp.

2. Alphabet Inc CL A (12.68%) and CL C (10.46%) : Alphabet is the parent company of Google, one of the most influential companies in the technology and communication services sector. Alphabet's portfolio extends beyond search engines to include various internet-related services and products.

3. Verizon Communications Inc (4.39%) : A key player in integrated telecommunications services, Verizon is one of the largest communication technology companies globally.

4. Comcast Corp CL A (4.38%) : As a leading player in the cable and satellite industry, Comcast is known for its broadcasting and cable television services.

And here's the glaring problem. Meta and Alphabet alone account for 40% of the fund. Talk about idiosyncratic risk! This may have over 100 stocks, but its performance is largely driven by just two companies.

Aside from company-specific risk, the industry diversification is also fairly concentrated, with the largest sub-industry being Interactive Media & Services.

Peer Comparison: FCOM vs. Others

While FCOM holds a prominent position in the communication services ETF landscape, it does have some competitors. Two of the most significant ETFs in this space are the Communication Services Select Sector SPDR Fund ( XLC ) and the Vanguard Communication Services ETF ( VOX ).

When comparing the expense ratio, FCOM leads the pack with a category-leading expense ratio of 0.08%, with XLC and VOX both at 0.10%. FCOM has performed in line with VOX over the last year, but the ratio against XLC has been trending lower, suggesting XLC might be a comparatively better relative strength play for those wanting exposure to the space.

Conclusion

It's a good fund, but I worry about the concentration in Meta and Alphabet. Clearly these are behemoths in the industry but the company specific risk may be just too large here. This is a pass for me on that alone.

For further details see: