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Investment Thesis
Vanguard Communication Services ETF (NYSEARCA:VOX) warrants a buy rating due to the strong potential for its top holdings to outperform the market overall. Technological advances for Meta Platforms, Inc. (META) and Alphabet Inc. (GOOG) (GOOGL), as well as expected growth for streaming services, will drive strong returns for VOX and peer communication services funds. While the communication services sector has historically underperformed the market overall, these factors are likely to reverse this trend.
Fund Overview and Compared ETFs
VOX is a passively managed ETF that seeks to capture the performance of stocks within the communication services sector. With its inception in 2004, the fund has 116 holdings and $4.2B in AUM. Its holdings include telephone, cellular, and data transmission sub-industries. VOX is heaviest on the interactive media and services sub-sector (50.70%), followed by movies and entertainment (14.50%).
For comparison purposes, other funds examined are the Fidelity MSCI Communication Services Index ETF (FCOM), the iShares Global Comm Services ETF (IXP), and the Communications Services Select Sector SPDR Fund (XLC). These funds were chosen due to their similar objectives to VOX. Fidelity’s FCOM utilizes a representative sampling strategy and selects communications services holdings based on fundamental characteristics. A distinct difference for IXP is that it is a global fund and therefore includes international communications holdings. IXP is the smallest fund compared with less than $1B in AUM. XLC seeks to capture the returns of communication sectors holdings specifically within the S&P 500 Index.
Performance, Expense Ratio, and Dividend Yield
VOX has demonstrated an average annual 10-year return of 6.56%. FCOM has performed the best of compared funds with an average 10-year annual return of 9.05%. IXP has performed the worst over the past decade with an average 10-year return of 4.41%. XLC was initiated in June 2018 so a 5-year lookback was used for that fund. XLC’s 5-year average annual return was 12.56%. While the communications funds underperformed the S&P 500 Index over the past 5-year and 10-year periods, they have outperformed the market over the past year. I will cover more on this trend reversal later in this article.
10-Year Performance: VOX and Compared Communications Services Sector ETFs (Seeking Alpha)
Many of Vanguard’s sector-focused funds, including VOX, have a 0.10% expense ratio. Although this is inexpensive compared to all exchange traded funds, it is average compared to peers. None of the communication services funds examined have significant dividend yields. Additionally, only XLC has seen a growing dividend yield over the past five years. While we will cover each funds’ holdings in greater detail later, this low dividend yield is generally because the top holdings for each fund are growth-focused versus income-focused.
Expense Ratio, AUM, and Dividend Yield Comparison
|
VOX |
FCOM |
IXP |
XLC |
|
|
Expense Ratio |
0.10% |
0.08% |
0.42% |
0.09% |
|
AUM |
$4.20B |
$1.08B |
$277.34M |
$18.58B |
|
Dividend Yield TTM |
0.93% |
0.74% |
0.84% |
0.80% |
|
Dividend Growth 5 YR CAGR |
-2.75% |
-9.74% |
-19.86% |
13.58% |
Source: Seeking Alpha, 6 Apr 24
VOX Holdings and Its Competitive Advantage
VOX has the greatest diversification of compared funds at 116 holdings. For all funds, the heaviest holding is META. The second heaviest holding of all ETFs is Alphabet Inc. This includes both class A shares, GOOGL, which provide voting rights as well as class C shares, GOOG, which do not offer voting rights.
Top 10 Holdings for VOX and Peer Communication Services ETFs
|
VOX – 116 holdings |
FCOM – 110 holdings |
IXP – 88 holdings |
XLC – 22 holdings |
|
META – 23.22% |
META – 27.84% |
META – 21.40% |
META – 23.28% |
|
GOOGL – 12.27% |
GOOGL – 11.14% |
GOOGL – 13.61% |
GOOGL – 12.65% |
|
GOOG – 9.83% |
GOOG – 8.92% |
GOOG – 11.49% |
GOOG – 10.69% |
|
CMCSA – 4.66% |
NFLX – 5.05% |
700 – 4.81% |
VZ – 4.58% |
|
NFLX – 4.63% |
DIS – 4.68% |
DIS – 4.76% |
NFLX – 4.56% |
|
DIS – 4.48% |
VZ – 4.39% |
NFLX – 4.38% |
TMUS – 4.47% |
|
VIS – 4.43% |
CMCSA – 3.94% |
VZ – 4.36% |
EA – 4.46% |
|
T – 3.50% |
T – 3.45% |
CMCSA – 4.04% |
T – 4.46% |
|
TMUS – 2.94% |
TMUS – 2.97% |
T – 3.06% |
DIS – 4.37% |
|
TTD – 1.44% |
TTD – 1.49% |
TMUS – 2.06% |
CMCSA – 4.28% |
Source: Multiple, compiled by author on 6 Apr 24
To further examine each funds’ potential performance, I looked at two main areas. First, the historic performance trend for each fund compared to other market sectors was examined. Second, I explored the prospects for each fund’s top holdings looking forward. Both of these areas are discussed in further detail below.
Communications Sector Historic Performance
To help answer whether VOX warrants a buy rating, we can first look at the communications sector’s historic performance. Looking back from 1974 to 2019, we see that historically the communications sector has performed below the market overall. Additionally, the sector’s volatility, as measured by its standard deviation, was slightly higher than the market overall. The clear outperformer over the 35-year timeframe was consumer staples.
Historic Performance and Volatility by Sector 1974-2019 (Fourpillarfreedom.com)
However, sector trends change. First, Google’s initial public offering was in 2004, and has since become a juggernaut in the communication services industry. Second, Facebook, now META Platforms, held its IPO back in 2012, also changing the sector’s landscape. As a result, the communications sector has seen multiple winning years recently. In 2020, the communication services sector was the 3rd best performing sector (23.5% return) after information technology and consumer discretionary. In 2023, the communications sector was the 2nd best performing sector (55.8% return) only after information technology (57.8%). However, 2022, when the market saw negative returns, the communications sector was the worst performing at -39.9% returns. Therefore, while the trend has been better returns, volatility has arguably increased as well.
Forecast for the Communications Services Sector
The primary reason why I would invest in VOX or any compared peer fund is if the prospects are better than “the market” overall. To answer this question, we must look at the outlook for two large champions of the communications services sector, META and Alphabet Inc. The first key factor is Meta’s investment into augmented reality, or AR. As a result of this investment, the company hopes to release AR glasses later this year. Further releases are planned that will aim to display holograms and video calls through the glasses, in a direct competitive move to Apple’s iPhone. At over 20% weight for all of the communication funds compared, strong earnings for the META could drive VOX to outperform the market.
At 20% combined weight, Alphabet’s GOOGL and GOOG holdings are the next heaviest holdings. Google’s Gemini chatbot is already keeping Google competitive in the generative search and AI space. Perhaps more exciting however is Google’s investment in quantum computing. I wrote extensively on this technology in a previous article. However, if turned into reality, such computing power can accelerate computing time multiple orders of magnitude greater than “classical” computers.
Finally, below Meta and Google in holdings weight are streaming services holdings such as Netflix (NFLX) and Disney (DIS). The streaming services industry is also expected to see strong growth. At a value of $544 billion currently, video streaming is expected to reach $1.9T by 2030. NFLX, DIS, and other top 10 holdings for VOX and peers stand to benefit from this exponential growth.
Current Valuation
Despite historic underperformance, the communications services sector has performed exceptionally well over the past few years. This has predominantly been driven by META with a 149% one-year return. VOX has a current price of $132.67 at the time of writing this article. This price is near the top of its 52-week range but significantly below its all-time high of $149.99 back in August 2021. VOX has seen an average performance of peer funds over the past year but has outperformed S&P 500 Index’s one-year performance of almost 27%.
VOX and Peer Communications Services Funds One-Year Performance (Seeking Alpha)
In addition to its strong performance, VOX is attractively valued with the lowest price-to-earnings ratio compared to peer funds. Additionally, all of these funds are lower than the S&P 500’s overall P/E ratio of 28.25. Looking forward, I expect VOX to continue to outperform the market overall. Its current valuation and growth potential of its top holdings prime the fund for continued returns.
Valuation Metrics for VOX and Peer Competitors
|
VOX |
FCOM |
IXP |
XLC |
|
|
P/E ratio |
21.77 |
27.53 |
26.96 |
23.08 |
|
P/B ratio |
2.90 |
2.48 |
2.88 |
2.86 |
Source: Compiled by Author from Multiple Sources, 6 Apr 24
Risks to Investors
Although the communications services industry has seen a reversal in its historic underperformance, it has also experienced greater volatility. VOX has a beta value of 1.03 compared to the Dow Jones U.S. Total Stock Market Index. This beta value, while a measure of correlation, implies a slightly greater volatility than “the market” overall. Additionally, VOX’s top holdings have high valuations. META for instance, VOX’s top holding, has a P/E ratio almost double its sector median. Alphabet Inc. is also higher than its sector’s price-to-earnings ratio. These top holdings risk a correction to their share prices if their investment into future technology is unfruitful.
Concluding Summary
VOX is a low-cost fund that has outperformed the market over the past year. While communication services companies have historically underperformed, VOX’s top holdings demonstrate strong growth potential, allowing the fund to continue the performance trend seen this past year. Additionally, the fund is favorably valued and has solid diversification with over 100 holdings. One drawback for the ETF and peer funds examined is that they experience increased volatility compared to the market. Despite this drawback, VOX warrants a buy rating due to its significant potential for performance looking forward.
