Netflix Inc. (NFLX)'s $82 billion deal to acquire Warner Bros Discovery Inc. (WBD)'s studio and streaming operations might reshape the entertainment industry for decades, but there's a more immediate consequence lurking in the ETF world that deserves attention.

The merger threatens to turn the Communication Services Select Sector SPDR (XLC) into one of the most top-heavy sector funds in the U.S. market, raising uncomfortable questions about whether these products can still function as diversification tools when entire industries consolidate into the hands of a few massive players.

A Fund Already Leaning Heavy Just Got Heavier

The XLC wasn't exactly a poster child for diversification before this deal landed. Meta Platforms, Inc (META) and Alphabet Inc. (GOOGL)'s two share classes already command more than 30% of the fund's assets. Netflix ranks among the top five holdings, but it's been playing a supporting role compared to the tech giants.

That balance is about to shift dramatically. By absorbing Warner Bros.' studio assets and streaming platforms including HBO and HBO Max, Netflix instantly doubles down on scale, earnings power, and market capitalization. Analysts tracking the deal suggest that if it closes as expected in 2026, Netflix could vault into the ETF's top tier, creating a three-company fortress that would control approximately half of XLC's entire portfolio, possibly more.

At that point, calling it a "communications services basket" becomes a stretch. It's really a mega-cap trio with some legacy media names sprinkled around the edges.

The Passive Money Feedback Loop

Here's where things get interesting from a market mechanics perspective. With no major competing streaming-focused ETFs available, XLC serves as the primary liquid vehicle for passive mandates seeking communications sector exposure. That creates a potentially problematic feedback loop worth watching.

The cycle works like this: A larger Netflix means higher index weighting, which triggers greater automated inflows into XLC. Those inflows force the ETF to buy more Netflix shares. The forced buying pushes the stock price higher, which increases market cap, which increases index weight further, and the cycle repeats.

If the merger clears regulatory review, XLC could become the single biggest amplifier of Netflix's post-deal valuation, not because of fundamental business performance, but because of passive fund mechanics.

What This Means for Investors

For both retail and institutional investors counting on sector ETFs to provide diversified exposure, the transformation of XLC represents a potential disconnect between label and reality. The wrapper might say "communication services," but the actual portfolio could soon translate to "three massive stocks with a side of everything else."

The Netflix-Warner Bros combination may mark a turning point for the sector ETF model itself. It's a stark reminder that diversification is getting harder to deliver when entire industries consolidate into the portfolios of a shrinking number of corporate giants. As concentration increases, the distinction between buying a sector fund and simply owning a handful of mega-cap stocks becomes increasingly blurry.