A Comprehensive Guide to Telecom ETFs

Zacks

The telecommunications industry is identified as a major driver of global economic recovery. Unprecedented growth in high-speed mobile Internet traffic, in particular for wireless data and video, has transformed the industry into the most evolving, inventive, and keenly contested space. In addition, the emergence of wireless broadband technology has created several new service areas, which offer huge growth potential. (Read: Play Surging Electric Car Demand with the Lithium ETF)
 
Currently, the U.S. Telecommunications Industry is evolving around 5 broad factors. These include factors like, the wireless gradually becoming the future of the telecom industry and consequently spectrum is gaining popularity. High-speed fiber-based network is projected to expand more aggressively, especially for video/TV offerings.
 
In addition, consolidation within the industry will continue mainly due to shortage of airwaves and for attaining economies of scale. Innovative products will be launched in areas of m-Commerce, virtualization and cloud-based technology, high-speed metro Ethernet, to name a few. Apart from these, there still remains ample scope for expansion in the U.S.  According to the Federal Communications Commission (:FCC), nearly a fifth of rural American households lack broadband access. (Read: 4 Unbeatable Strategies for Q4)
 
The lack of public airwaves (spectrum) in the telecommunications industry creates a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with large carriers. Furthermore, it is not easy to establish a new telecom carrier since it will require government approval to transmit voice, data, and video on public airwaves. Spectrum licenses are limited and therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford.
 
We believe the overall economic dynamics may shift in favor of the telecommunications industry as it is a major infrastructure product for both the emerging and the developed nations. Telecommunications is one of the very few industries to witness considerable technological improvement even under recession. The continuous improvement in products and networks coupled with inventions by industry players provide a major thrust to the telecommunications sector. (See all Telecommunications ETFs Here)
 
Moreover, growing demand for technically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Metro Ethernet, IPTV, cloud computing, managed IP services, m-commerce, m-banking, telematics services are some of the major innovations in recent times. These developments are also helping telecom equipment manufacturers, infrastructure solutions providers, and mobile phone makers to consolidate finances.
 
ETFs to Tap the Sector
 
Below, we highlight ETFs in this sector in greater detail for Telecom ETF investors:
 
iShares S&P Global Telecommunications ETF (IXP)
 
IXP is one of the most popular Telecom ETF available in the market. Launched in Nov 2001, this ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $493.88 million of assets under management and an average trading volume of roughly 78,860 shares a day in the last 3 months. The fund charges an expense ratio of 48 basis points a year.
 
The fund holds 36 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.98% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc., Vodafone group plc. and Verizon Communications Inc. with asset allocation of 14.81%, 13.69% and 11.07%, respectively. Diversified Telecommunications Services and Wireless Telecommunications Services are the two major sectors with asset holdings of 66.29% and 33.37%, respectively. This ETF offers a dividend yield of 3.91%.
 
Vanguard Telecommunication Services ETF (VOX)
 
Another popular fund in the Telecom ETF space is VOX. Launched in Sep 2004, this ETF seeks to track the performance corresponding to the benchmark MSCI US Investable Market Telecommunication Services 25/50 Index. It has assets under management of nearly $531.9 million and an average trading volume of roughly 36,368 shares a day in the last 3 months. The fund charges an expense ratio of 14 basis points a year.
 
The fund holds 33 stocks in its portfolio and has a concentrated approach in the top ten holdings with 68.9% of the asset base invested in them. Among individual holdings, top stocks in the ETF are Verizon Communications, AT&T and Crown Castle International Corp. Integrated Telecommunications Services, Wireless Telecommunications Services and Alternative Carriers are the three major sectors with asset holdings of 62.8%, 23.3% and 13.9%, respectively. This ETF offers a dividend yield of 3.06%.
 
SPDR S&P Telecom ETF (XTL)
 
Incepted in Jan 2011, XTL ETF tries to match the returns of the S&P Telecom Select Industry Index, before expenses. The fund manages an asset size of nearly $7.89 million and an average trading volume of roughly 1,683 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.
 
The fund holds 54 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 23.75% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Brocade Communications Systems Inc., Motorola Solutions Inc., and Ixia with asset allocation of 2.45%, 2.41% and 2.40%, respectively. Communications Equipment, Wireless Telecommunications Services, Integrated Telecommunication Services and Alternative Carriers are the four major sectors with asset holdings of 61.44%, 14.43%, 12.99 and 10.91%, respectively. This ETF offers a dividend yield of 2.31%.
 
iShares Dow Jones US Telecom ETF (IYZ)
 
Incepted in May 2000, IYZ ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the Dow Jones US Select Telecommunications Index. The fund manages assets worth of nearly $431.06 million and an average trading volume of roughly 365,369 shares a day in the last 3 months. The fund charges an expense ratio of 46 basis points a year.
 
The fund holds 26 stocks and has a concentrated approach in the top ten holdings with 66.63% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon Communications and Crown Castle with asset allocation of 13.13%, 11.82% and 7.22%, respectively. Fixed Line Telecommunications and Mobile Telecommunications are the two major sectors with asset holdings of 58.63% and 41.35%, respectively. This ETF offers a dividend yield of 2.68%.
 
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Read the analyst report on IXPRead the analyst report on VOXRead the analyst report on XTLRead the analyst report on IYZZacks Investment Research
 
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