The S&P 500 (^GSPC -1.11%) is up 26.8% through Dec. 2, and certain sectors are doing even better. The Communication Services sector, for instance, is up 34.2% so far in 2024.
Investment management firm Vanguard has an exchange-traded fund (ETF) that tracks the performance of the S&P 500's communications sector. The Vanguard Communications ETF (VOX -1.12%) is up 33.4% at the time of this writing, and there's reason to believe the fund is still a great value for investors interested in communications stocks like Google parent company Alphabet (GOOGL -1.45%) (GOOG -1.55%), Meta Platforms (META -0.59%), Netflix (NFLX -1.80%), and Walt Disney (DIS -0.89%).
With a 0.1% expense ratio and a minimum investment of just $1, here's why the Vanguard Communications ETF is a great buy now for any level of investor.
Image source: Getty Images.
A dynamic sector
Out of the 11 stock market sectors, communications is arguably the most unique. It has traditional media giants like Comcast and Disney, video game companies like Take-Two Interactive, Electronic Arts, and Roblox, social media companies like Meta Platforms, Pinterest, and Snap, and telecom companies like Verizon Communications, AT&T, and T-Mobile.
The sector covers the infrastructure, distribution, creation, and consumption of entertainment and media and a blend of legacy and newer companies. Despite the diversification, it's important to understand just how dominant the top holdings are. Alphabet and Meta Platforms make up a combined 44.1% of the fund. Netflix is the third-largest holding with a 4.6% weighting, which is larger than Comcast at 4.2% or Disney at 3.8%.
With such a large concentration of growth stocks, you may think that the communications sector sports an expensive valuation -- but it doesn't. Meta Platforms has a price-to-earnings (P/E) ratio of 27.1, and Alphabet has a mere 22.4 P/E ratio. For context, the S&P 500 has a P/E ratio of 30.9.
Volatile business models
Part of the reason that Meta and Alphabet are such cheap stocks is due to doubts that they can continue growing their earnings at their prior pace.
Meta has seen a surge in profitability in recent years as it has monetized Instagram and made it a hotbed for advertisers to target an engaged audience with ads based on buyer preferences. But Meta is also spending (and losing) billions each quarter on research and development for its Reality Labs division -- which is building out products and services that remain largely unproven. If Instagram takes a hit from competition or a cyclical downturn in the advertising industry, investors may lose patience with Reality Labs and Meta will look expensive.
Alphabet is dealing with a slew of issues, too. YouTube remains a powerhouse, but Google Cloud is a distant third behind Amazon Web Services and Microsoft Cloud. The Department of Justice wants Alphabet to divest its Chrome browser and the Android mobile operating system -- which are much more valuable as part of Alphabet than separate from it.
Netflix stock is trading up 82% year to date, so its P/E ratio has also expanded. But Netflix has been fairly cheap in recent years due to concerns with its business model. To justify price increases and retain and grow its subscriber base, Netflix has to spend a ton on new movies and shows -- which puts a lot of pressure on developing engaging content. Netflix's business model has changed from content procurement to content creation, which has been a good switch for long-term investors but makes the company more prone to volatility based on the reception of its content.
Disney's business model is cyclical and capital-intensive. Disney has a forward P/E ratio of just 21.6 -- which is fairly cheap. But Disney+ has only recently become profitable -- namely by lowering content spending. Disney has had better results at this year's box office than in recent years but hasn't been able to return to its pre-pandemic success when it was releasing hit after hit from the Marvel and Star Wars universes. The park's business remains a cash cow but is prone to downturns based on the economic cycle. And it takes a lot of money to maintain the parks and build new attractions.
In sum, many top stocks in the communications sector are inexpensive for good reasons, but they are arguably good buys for folks who can endure volatility.
Balancing growth and value
Investing in the communications sector through an ETF such as the Vanguard Communications ETF has many benefits. The ETF smooths out the cyclicality of the sector. By investing in Netflix, Disney, and Comcast instead of just one of those companies, an investor benefits from growth in streaming and legacy media. Buying multiple video game makers is a bet on the industry's growth rather than just one player. If Instagram takes market share from YouTube, gains in Meta could more than offset losses from Alphabet.
The ETF has just a 25.7 P/E ratio and a 1% yield, making it a similar valuation to the Vanguard Utilities ETF's 25.5 P/E ratio despite having way more growth potential than that sector.
By comparison, the Vanguard Information Technology ETF -- led by Apple, Microsoft, and Nvidia -- has a sky-high P/E ratio of 46.2.
All told, the Vanguard Communications ETF is an excellent way to get exposure to top growth stocks without paying a premium price relative to the S&P 500.
