1 week Ago
Luis Alvarez Introduction We last covered iShares Global Comm Services ETF ( NYSEARCA: IXP ) back in July 2020 . At that time, we had a positive view, as we thought the pandemic will have a pull forward effect on services offered by stocks in IXP's portfolio. However, the pandemic is now over, and it has been four years since we last covered this stock.
It is time for us to analyze IXP and provide our insights and recommendations. ETF Overview IXP owns a portfolio of about 85 global communication services stocks. The fund constructs its portfolio by selecting communication services stocks in the S&P Global 1200 Index.
IXP has a high expense ratio of 0.41%. For example, Communication Services Select Sector SPDR ETF ( XLC ) only has an expense ratio of 0.
09%. IXP has delivered a total return of about 261% since its inception in November 2001. This is equivalent to an average annual return of 5.
9%. In contrast, the S&P 500 index has delivered a much better total return of about 651% in the same period. The fund is very concentrated, as its two top holdings represent over 40% of the portfolio.
Looking forward, revenue growth for stocks in IXP's portfolio is expected to slow down due to decelerating digital advertising revenue growth. Although its valuation appears to be attractive, investors with a long-term investment horizon should seek alternatives instead, as slower growth will eventually limit its total return in the long run. YCharts ETF Analysis Significant concentration risk The fund has significant concentration risk as its two top holdings, Meta Platforms ( META ) and Alphabet ( GOOGL , GOOG ) represent about 42.
6% of the total portfolio. In contrast, its third and fourth-largest holdings, Netflix ( NFLX ) and Verizon Communications ( VZ ), consist of 4.7% and 4.
6% of IXP's total portfolio respectively. This concentration risk can be problematic, especially if Meta Platforms or Alphabet deliver very poor financial reports. iShares Advertising spending is key IXP's heavy concentration on Meta Platforms and Alphabet also reveals to us an important metric to monitor: advertising spending.
This is because the majority of Meta Platforms and Alphabet's revenues are derived from advertising income. Fortunately, as shown from the chart below, digital advertising spending is still growing at a robust pace with an expected growth rate of about 12.5% in 2024.
This growth trend is expected to continue through 2028 and beyond. Statista While digital ad revenue growth has been growing in double digits in the past decade, this growth rate is decelerating. As can be seen from the chart below, this growth rate is slowing down as time unfolds.
Therefore, it is natural to expect Meta Platforms and Alphabet's ad revenue growth rates to slow down as well. Statista Communication services market has steady but not rapid growth trend In the traditional communication services space, the growth rate is growing, albeit at a much slower pace. As can be seen from the chart below, global communication services revenue is expected to reach $1.
5 trillion in 2024. However, the growth rate is expected to be only about 2.0% annually through 2028, reaching $1.
6 trillion. Statista IXP is attractively valued Let us now take a look at IXP's valuation. Since it is an arduous task to go through each individual stocks (there are over 80 stocks in IXP's portfolio) and check their forward P/E and their average 5-year P/E ratio individually, we will only look at its top 10 holdings.
This method is valid because IXP's top 10 holdings represent about 71% of its total portfolio. As can be seen from the table below, the weighted average forward P/E ratio of these top 10 holdings is about 17.2x.
This is below the average 5-year P/E ratio. Therefore, we think IXP's valuation is attractive, based on our analysis of the top-10 holdings. Source: Morningstar, Created by author One risk: Economically sensitive As we have discussed earlier, revenues of IXP's top two holdings depends on advertising.
This revenue stream depends on the strength of the economy. In times of economic prosperity, advertisers will likely be much more willing to spend money on advertisements. On the other hand, in times of economic downturn, advertisers will be less willing to spend money on advertisements Therefore, IXP's fund price performance can be vulnerable during economic downturn.
Investors should be aware of this risk. Investor Takeaway Despite IXP's attractive valuation relative to its 5-year average P/E ratio, its portfolio of communication services stocks appears to have a slow growth profile. Therefore, we think investors with a long-term investment horizon may want to seek alternatives elsewhere.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).
I have no business relationship with any company whose stock is mentioned in this article. Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
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