Forget QQQ: This ETF Marries the Magnificent 7 and Communications

The technology sector gets a lot of love from financial media, retail investors and sell-side firms. It’s home to the biggest players in the ongoing AI rally, as well as most of the Magnificent Seven stocks. As a result, ETFs that focus on the growth prospects of that sector tend to be in the forefront of investors’ minds.

One example is the , Series 1, which is among the most popular tech-focused ETFs with $364.41 billion in assets under management (AUM). As you might expect, that fund’s top 10 holdings include all of the Magnificent Seven stocks as well as Broadcom and , and its weightings demonstrate how all-in it is on those companies. , its largest holding, carries a weighting of 9.95%.

In fact, the QQQ’s top 10 holdings account for an astounding 52.2% of the entire portfolio. That poses a concentration risk. But for ETF investors that look beyond tech, one sector—and a fund that tracks it—provides a more balanced approach by including Magnificent Seven exposure augmented by the market’s leading telecom, media, and entertainment companies.

The Communication Services Sector Should Have Your Attention

Since the S&P 500’s rebalancing in September 2018, Magnificent Seven companies and other former tech sector members—including , , and Netflix—transitioned to the communication services sector. The results have been remarkable.

In the subsequent six years, communications has finished in the top three sectors on four occasions. Five of those years saw sizable gains, including 32.7% in 2019, 23.6% in 2020, 21.6% in 2021, 55.8% in 2023, and a market-leading 40.2% in 2024.

The only year it failed to post a return was 2022 during the extended bear market, when it lost 39.9%. But with its performances in the other five years since the index’s 2018 rebalancing, communication services has posted an average annual return of 16.33%.

This year, the communications has a year-to-date gain (YTD) of 18.60%, best among all 11 sectors and well ahead of the next-best performer, industrials, and its 14.81% YTD gain. Importantly, the sector combines growth potential, consistent consumer demand, and—unlike tech—defensive characteristics during market downturns.

Why the XLC Is an All-in-One ETF

In June 2018, State Street launched the Communication Services Select Sector SPDR Fund. Since its debut, the ETF has gained 127.41%. For context, over the same period, the QQQ is up 91.69%.

The has considerably lower AUM at $26.14 billion, but its 0.08% expense ratio and 0.92% dividend yield offer superior alternatives to the QQQ’s 0.20% and 0.49%, respectively.

While the XLC’s largest holding, Meta Platforms, has an 18.81% weighting, which is higher than the QQQ’s allocation to its top holding, NVIDIA, looking at how the rest of the portfolio is constructed suggests a higher degree of diversification, and therefore, a lower degree of volatility.

Beyond Meta, Alphabet (both Class A and Class C shares), and Netflix, the XLC’s top 10 holdings are rounded out by:

The result is greater diversification and less risk. Specifically, the XLC’s implied volatility (IV) stands at 10.9—its lowest point in the last 52 weeks. Meanwhile, the QQQ’s tech-heavy approach has resulted in a current IV of 17.45%.

Building on that premise, the XLC is currently trading at a price-to-earnings (P/E) multiple of 19.40, which can be considered fair in a market environment rife with record valuations. By comparison, the QQQ’s current P/E is 33.33—higher than both the NASDAQ’s P/E of 29.77 and the S&P 500’s 28.97.

The Smart Money Loves the XLC

If there’s ever a barometer of how Wall Street feels about a given equity, scrutinizing its short position and institutional ownership can serve as that gauge.

The XLC has a short interest of 5.8 million shares, as of the Aug. 15, 2025 settlement date. With average daily trading volume of around 6.2 million shares, this translates into a days-to-cover ratio of about 1.0 trading day.

This is a sharp decline from July, when short interest ranged between 12 and 14 million shares, with days-to-cover ratios closer to 2.4 days. In just a month, bearish positioning in the fund has more than halved, underscoring a meaningful unwinding of bets against the communication services sector.

Meanwhile, there have been more institutional buyers (836) than sellers (551) over the past 12 months, with inflows of $21.59 million surpassing outflows of $2.77 billion. In the second quarter of this year alone, institutional owners bought $19 billion worth of XLC while selling just $700 million.

The ETF receives a consensus Moderate Buy rating, with three analysts assigning it a Buy, 14 assigning it a Moderate Buy, and only one assigning it a Sell.

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