Alphabet’s Plunge Shows the Flip Side of Uncapped Sector ETFs
Shares of Google parent Alphabet got hammered on Thursday after its quarterly results raised worries about slowing search growth, disruption from AI and whether the company’s massive AI spending will pay off.
The stock fell 12.6%, its worst day since its 2004 IPO, wiping out roughly $480 billion in market value. Search revenue rose 12% to about $63 billion, short of the roughly $65 billion analysts expected, and free cash flow swung to a loss of about $9 billion as AI spending climbed.
I recently wrote about uncapped sector ETFs, which hold the biggest companies in a sector at their full market weights. Thursday was a case study in how much impact that can have.
The $123 million Global X PureCap MSCI Communication Services ETF (GXPC) fell a hefty 6.4% on Thursday, dragged down by its massive weight in Alphabet. The ETF has 56% of its portfolio in the company, compared with 22.5% for the capped State Street Communication Services Select Sector SPDR ETF (XLC), which fell just 1.9%.
That 56% is more than double the 25% single-stock limit under the diversification rules ETFs must follow. GXPC can hold that much because the rules are only tested at the end of each quarter, and shares of other ETFs, which the fund is allowed to hold, don’t count toward the limits.
Add Meta’s 22% weight, and GXPC has 78% of its assets in just two stocks, versus 44% for XLC. Both companies have tumbled after their earnings reports, and GXPC has dropped 16% over the past two weeks, compared with about 10% for XLC.
None of this means there’s anything wrong with GXPC. The fund is doing exactly what it’s designed to do, which is reflect the sector’s actual weights. And the same concentration that hurt it on Thursday works in its favor when the biggest stocks rally.
For investors in a diversified portfolio who want to overweight a sector without changing its makeup, an uncapped fund is the more accurate tool. And for traders betting on the sector on its own, the extra volatility may be exactly what they’re after.
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