XLC Holds 46% in Just Three Stocks, Creating An Unusual Risk for Sector ETF Buyers

When investors buy a sector ETF, they want exposure to a specific corner of the market without picking individual stocks. The Communication Services Select Sector SPDR Fund (NYSEARCA:XLC) delivers a concentrated bet on companies that control how we communicate, consume content, and connect online. Nearly all assets flow into Communication Services, with the top three holdings—Meta Platforms (NASDAQ:META | META Price Prediction), Alphabet (NASDAQ:GOOGL), and Netflix (NASDAQ:NFLX)—controlling close to half the portfolio. This concentration means investors are making a direct bet on digital advertising and streaming dominance rather than broad sector exposure.

That concentration is the point. XLC gives direct exposure to the digital advertising duopoly, streaming entertainment, and telecom infrastructure in a single ticker. For portfolios with broad market exposure through SPY (NYSEARCA:SPY) or Vanguard S&P 500 ETF (NYSEARCA:VOO), XLC can serve as a tactical overweight on companies benefiting from digital media, AI-driven advertising, and streaming subscriptions. It also fits investors who want tech-adjacent growth but prefer service-driven revenue models over pure hardware or semiconductor plays.

The Return Engine: Advertising, Subscriptions, and AI

XLC’s top holdings generate exceptional cash flow through dominant market positions. Meta and Alphabet both operate above 30% profit margins, reflecting their pricing power in digital advertising where AI-driven targeting has increased ad effectiveness. This profitability shows mature businesses extracting value from established platforms rather than burning cash for growth.

Netflix has evolved from a content-spending machine to a profit generator, now delivering 24% margins as it shifts focus to monetization through pricing and ad-tiers. The fund includes legacy telecom names like Verizon (NYSE:VZ) and AT&T (NYSE:T), which provide dividend income but drag on growth. The 1.12% dividend yield reflects this mix. XLC is not an income play, but offers modest cash flow alongside growth.

Performance: Solid, But Not Dominant

XLC has delivered respectable returns but hasn’t kept pace with the broader market. The fund gained 10.79% over the past year, trailing SPY’s performance despite holding mega-cap tech winners. This gap reveals the drag from legacy holdings—the fund tracks a sector index rather than actively rotating toward strength, meaning investors get the full weight of telecom alongside digital leaders.

The Tradeoffs

XLC’s concentration is both its strength and its risk. Three companies control over 40% of the portfolio. If Meta or Alphabet face regulatory headwinds, ad market weakness, or AI monetization delays, the fund will underperform. Investors have been actively hedging downside risk through options positioning. The fund’s 8 basis point expense ratio is low, but the opportunity cost of owning legacy telecom names instead of pure tech growth is real.

XLC works best for investors who want concentrated exposure to digital advertising and streaming without picking individual stocks. It is not a diversification tool. It is a sector bet.