If you are an individual stock aficionado or ETF enthusiast, you are likely familiar with Vanguard, a behemoth in the world of asset management and investment advising. Vanguard’s suite of ETFs boasts minimal fees of just 0.1% on each of the 11 sectors within the S&P 500. The Vanguard Communication Services ETF (NYSEMKT: VOX) has been a shining star this year, clocking in an impressive 13.6% increase in recent trading sessions.
What’s fueling this fund’s meteoric rise, and why might it be an attractive buy at this juncture?
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An Industry Revolution: Paradigm Shifts in the Communications Sector
The realm of communications has undeniably experienced profound disruption over the past few decades compared to other sectors in the stock market. The ubiquity and enhanced capabilities of mobile phones have propelled the importance of telecom giants like Verizon, AT&T, and T-Mobile. The transition from traditional cable TV to streaming services has propelled Netflix to almost double the value of Comcast. Innovators such as Roku have reshaped the TV landscape by prioritizing integrated media and streaming applications over conventional channels. The emergence of cloud-based advertising has elevated The Trade Desk to a pivotal role in the marketing ecosystem.
Yet, the most monumental transformation has transpired in the shift from print media to digital and social media; from newspapers to smartphones; from physical archives, fax machines, and localized IT units to centralized data centers and cloud infrastructure. These developments have revolutionized the communications sector and infused it with a plethora of growth prospects.
Explosive Growth at Compelling Valuations
An astounding 45% of the Vanguard Communication Services ETF is dominated by Alphabet (NASDAQ: GOOGL & GOOG) and Meta Platforms (NASDAQ: META). This concentration didn’t evolve overnight. ETFs rejig their weightings to reflect alterations in market capitalization. For instance, if Companies A and B possess an equal 4% weighting and Company A spikes by 50% while Company B dips by 50%, Company A’s weight would climb to 6%, with Company B dwindling to a mere 2%.
This rebalancing has tilted the communications sector towards top-heaviness, empowering Alphabet and Meta Platforms to significantly sway the sector. Meanwhile, erstwhile valuable smaller entities could double in value and still only command a 1-2% allocation.
The enchantment of the communications sector lies in its blend of youthful, high-growth firms with established stalwarts, many of which offer hefty dividends. Surprisingly, the Vanguard Communication Services ETF boasts a modest 22.1 price-to-earnings ratio and a 1% yield – notably lower than the Vanguard Information Technology ETF’s 40.4 P/E ratio.
Despite hovering near record highs, Alphabet and Meta Platforms are trading at bargain levels – both below 24 forward P/E ratios. This positions them as the two most inexpensive “Magnificent Seven” stocks based on this metric.
GOOGL PE Ratio (Forward) data by YCharts
Mixing the reasonable valuations of the top two growth holdings with the value orientation of telecom firms, cable providers, and other telecommunications entities, this sector offers a unique blend of growth, value, and income.
A Balanced Bet for Today
The Vanguard Communication Services ETF has surged an eye-popping 62.6% since the onset of 2023, largely powered by stellar performances from Alphabet, Meta Platforms, and Netflix. Such rapid gains over a relatively brief period could pave the way for short-term volatility or even an ETF sell-off. Nonetheless, the valuation remains compelling, and earnings expansion has been stellar.
The burgeoning trends of artificial intelligence, virtual reality, augmented reality, and the metaverse are only in their nascent stages but are poised to reverberate across the communications sector for decades to come.
In essence, the Vanguard Communication Services ETF stands as the simplest conduit to partake in the next wave of information and media evolution and consumption.
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