Should You Buy Vanguard's Hottest Sector-Based ETF?

If you like investing in individual stocks and exchange-traded funds (ETFs), chances are you're familiar with Vanguard, one of the largest asset managers and investment advisors in the world.

Vanguard offers ETFs with just 0.1% annual fees on each of the 11 sectors in the S&P 500. So far this year, the Vanguard Communication Services ETF (NYSEMKT:VOX) has performed the best, up an impressive 13.6% at recent prices.

Here's why the fund is doing so well, and why it could be worth buying now.

Image source: Getty Images.

Paradigm shifts in the communications sector

Out of all the sectors in the stock market, communications has arguably been the single most disrupted sector over the last few decades. The widespread adoption and increased functionality of mobile phones have given rise to the importance of phone carriers and internet providers like Verizon, AT&T, and T-Mobile.

The shift from traditional cable TV to streaming has made Netflix worth nearly twice as much as Comcast. And companies like Roku have changed the TV industry with a priority on integrating different streaming and media applications instead of channels or stations.

The evolution of cloud-based advertising has made The Trade Desk an incredibly important marketing resource.

But the greatest evolution of all has been the shift from print media to digital and social media; from the newspaper to the smartphone; from reams of physical documentation, fax machines, and localized IT departments to centralized data centers and cloud infrastructure.

These themes have disrupted the communications sector and jolted it with growth opportunities.

VOX data by YCharts

Big-time growth at a good value

Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) and Meta Platforms (NASDAQ:META) make up a staggering 45% of the Vanguard Communication Services ETF. But it wasn't always this way.

ETFs rebalance their weightings to adjust for changes in market capitalization. For example, suppose Company A and Company B both have an equal 4% weighting. If Company A goes up 50% and Company B goes down 50%, then Company A will see its weighting go up to 6%, while Company B's will go down to just 2%.

Rebalancing has made the communications sector more top-heavy, so Alphabet and Meta Platforms can really move the sector, while smaller companies that used to be more valuable could double and still come in at a mere 1 or 2 percentage points.

What makes the communications sector so attractive is that it balances younger, fast-growing companies with traditional stalwarts -- many of which pay large dividends. It may surprise you to learn that the Vanguard Communications Services ETF has a 22.1 price-to-earnings ratio and a 1% yield. That's significantly less than the 40.4 P/E of the Vanguard Informational Technology ETF.

Despite hovering around all-time highs, Alphabet and Meta platforms are inexpensive -- both trading below 24 forward P/E ratios. That makes them the two cheapest "Magnificent Seven" stocks based on that metric.

GOOGL PE Ratio (Forward) data by YCharts

Combine the reasonable valuation of the top two growth holdings with the value bent of cell carriers, cable and satellite companies, and other telecommunications companies, and you get a sector that blends growth, value, and income unlike any other.

A balanced ETF to buy now

The Vanguard Communications Services ETF is up a mind-numbing 62.6% since the start of 2023 -- largely thanks to outsized gains by Alphabet, Meta Platforms, and Netflix. A gain that large in a relatively short period of time could set the stage for short-term volatility or even a sell-off in the ETF. However, the valuation remains inexpensive, and earnings growth has been excellent.

Trends such as artificial intelligence, virtual reality, augmented reality, and the metaverse remain in their infancy but will likely have ripple effects throughout the communications sector for decades to come.

All told, the Vanguard Communications Services ETF remains the simplest way to invest in the next evolution of information and media sharing and consumption.

Should you invest $1,000 in Vanguard World Fund - Vanguard Communication Services ETF right now?

Before you buy stock in Vanguard World Fund - Vanguard Communication Services ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard World Fund - Vanguard Communication Services ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $697,878!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 28, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Roku, Tesla, The Trade Desk, and Vanguard Real Estate ETF. The Motley Fool recommends Comcast, T-Mobile US, and Verizon Communications and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.