What is a Communication Industry ETF

A Communication Industry ETF is an exchange-traded fund (ETF) that invests in telecommunications companies with the objective of replicating the performance of an underlying telecom index. Communication industry ETFs include giant integrated providers of wireless and wire line services, as well as smaller companies that specialize in wireless services or manufacture communications equipment. 

BREAKING DOWN Communication Industry ETF

Communication Industry ETFs reflect the defensive characteristics of telecom companies, such as their high dividend yields and relatively stable cash flows. As a result, an ETF based on telecoms will be less volatile than the broad market and will tend to outperform during turbulent economic times. On the downside, communication industry ETFs are likely to be laggards in a bullish market. 

These ETFs generally fall under the umbrella of telecom ETFs and are one of the smaller categories of equity sector ETFs. Only seven communications ETFs are currently available to investors, according to etfdb.com. Certain ETFs providing exposure to the consumer discretionary and information technology sectors also include telecom companies. Most communication ETFs hold AT&T and Verizon Communications as their largest positions but vary significantly in their additional equity holdings. These differences are a function of the shrinking telecom industry, the S&P 500 currently holds just four telecom stocks, and the evolving definition of communications.

The Future of Communication Industry ETFs

Most ETFs track indexes licensed by index providers such as S&P Global Indices, MSCI or Russell.  S&P and MSCI divide the U.S. and global equity markets into 11 industry sectors based on the Global Industry Classification Standard – GICS. In September 2018, GICS will expand and rename the telecommunications services sector into the communication services sector. This move is expected to impact at least 30 sector ETFs, including all current communication industry ETFs.

The renamed communication services sector will include existing telecommunication companies, as well as companies selected from the consumer discretionary sector currently classified under the media industry group and the internet & direct marketing retail sub-industry, along with select companies currently classified in the information technology sector. As a result, communications ETFs will feature more growth-oriented characteristics than in the past.

GICS noted the rapidly changing nature of communications in announcing the sector change in November 2017. Integration between telecommunications, media, and internet companies has impacted the way individuals communicate, access entertainment content and other information. Merger & acquisition activity across these sectors has facilitated the bundling of cable, internet and telephone services as well as the integration of distribution with programming content. The emerging dominance of social media companies as leading providers of communication services, increasingly through mobile platforms, has also driven these sector changes.