Tepid on Telecom ETFs

ETF Trends

Telecom exchange traded funds have proven resilient to the recent rise in Treasury yields.

Over the past three months, 10-year Treasury yields are up 6.44% while the iShares U.S. Telecommunications ETF (IYZ) is up 5.3%. That is a decent showing, but one that lags the 6.3% returned by the S&P 500. Year-to-date, major U.S. telecom ETFs are up more than 20%. Again a decent showing, but one that lags the S&P while underscoring the sector’s sensitivity to higher interest rates. [Sector ETF Trends Show Investors are Turning Defensive]

Stable, growing dividends are a primary reason investors embrace the low-growth telecom sector and for the biggest telecom names, those dividends look safe.

“Despite the highly competitive dynamics at play, we see broadband growth contributing to steady free cash flow growth and stable dividend performance,” said S&P Capital IQ in a new research note. “While potential dividend cuts remain a key risk, we believe payout ratios are sustainable in the near-term horizon.”

The research firm has three-star ratings on Dow components AT&T (NYSE: T) and Verizon (VZ). S&P Capital IQ is more enthusiastic on CenturyLink (CTL), Frontier Communications (FTR) and Consolidated Communications (CNSL), rating each company four stars. Windstream Holdings (WIN), with a 12.4% dividend yield, earns a five-star rating from S&P Capital IQ.

The Vanguard Telecommunication Services ETF (VOX) is dominated by AT&T and Verizon as those stocks combined for 44.2% of the ETF’s weight at the end of November. CenturyLink and Windstream are also top-10 holdings in VOX combining for 6.3% of the fund’s weight, according to Vanguard.

The $619.1 million fund has a trailing 12-month yield of 2.9% and is rated marketweight by S&P Capital IQ.

“S&P Capital IQ has an overall Marketweight ranking on VOX, which seeks to track the price performance of the underlying holdings in the MSCI US Investable Market Telecommunication Services Index. VOX is comprised solely of U.S Telecom Services investments, with roughly 61% in Integrated Telecom Services, 24% in Wireless Services, and 15% in Alternative Carriers. Its top 10 holdings comprise 69% of the $562 million total assets.

“Bellwethers Verizon and AT&T comprise, in aggregate, 44% of the ETF’s holdings and are yielding 4%-5%. Within the top 10 holdings, 9% of the ETF’s holdings are in tower companies, 5% are in pure play wireless carriers, and 4% are in high dividend yielding wireline carriers. VOX pays a healthy 2.9% dividend yield, above the S&P 500 yield of 2%,” said S&P in the note.

With an annual expense ratio of 0.14%, VOX is cheap, but the cheapest telecom ETF is the new Fidelity MSCI Telecommunication Services Index ETF (FCOM) , which charges 0.12% per year. The SPDR S&P International Telecommunications Sector ETF (IST) is 2013’s top-performing telecom ETF. [This Telecom ETF Didn't Disappoint in 2013]

Vanguard Telecommunication Services ETF

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