What Like Ahead for Telecom ETFs?
The U.S. telecommunications industry is currently balanced with almost equal proportions of positive and negative influences. This year, we expect this industry to witness growth more or less in line with the broader market.
Positive Factors
At present, the U.S. telecom industry enjoys several positive attributes. First, the new telecom regulatory body – Federal Communications Commission (FCC) – has given enough indications that it will be less stringent compared with the Obama administration and is likely to roll back several regulations of the previous regime. Second, the less restrictive nature of the FCC will aid mergers and acquisitions which are likely to spur growth in 2017. Third, President Trump has decided to improve broadband availability in rural areas. Rural broadband development will be an element of his ambitious $1 trillion infrastructure plan he will submit to the Congress soon. (Read: Bitcoin Soars to Record High—Fork, Futures and ETFs Explained)
Negative Factors
However, several near-term headwinds prevail in the telecom industry. The chief ones include growing price competition for wireless services that are likely to reduce carriers' revenue growth in 2017. Leading cable MSOs (multi service operators) have decided to enter the wireless field this year, which is likely to intensify competition in an already saturated market. Further, capital spending by U.S. telecom carriers may be muted in 2017. 4G LTE wireless penetration is currently 83% in North America. This can primarily be attributed to most carriers’ intention to upgrade to the 5G wireless network standard which requires massive investment. However, a full phased 5G network deployment is unlikely before 2020.
Internet of Things (IoT): The Next Growth Driver
IoT, which enables any physical electronic device with a valid IP-address to transfer data seamlessly over a wireless network, is fast gaining market traction and bringing about fundamental changes in business models. Next-generation superfast wireless networks (4G LTE, LTE-A, upcoming 5G) will provide the primary impetus to the telecom industry. In this context, IoT holds the potential to be the numero uno factor in driving growth in the space. Superfast 5G mobile networks will be of utmost importance in the management of exponential growth in IoT. (Read: 5 Smart Beta ETFs with Brilliant Returns)
Unlimited Data Plan War
Wireless consumers pay millions extra in the form of added surcharges, taxes, monthly fees and carrier price hikes every year. The practice seems to have peaked and carriers are still looking for ways to fetch more from their customers. Several consumer groups have criticized extra fees because these are easily overlooked and lead to higher-than-advertised price payments. The U.S. telecom market continues to witness intense pricing competition as success depends largely on technical superiority, quality of services and scalability. (Read: Q2 Earnings Effect--4 Must-See ETF Charts)
ETFs to Tap the Sector
Against this backdrop, investors seeking to tap the growth potential of the highly competitive telecom sector may take a closer look at the ETF approach to reap maximum benefit from investing in this sector. This technique can help to spread out assets among a wide variety of companies and reduce company specific risks for a very low cost. Below, we highlight the ETFs in this sector in greater detail for Telecom ETF investors:
iShares 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 $331.72 million of assets under management and an average trading volume of roughly 26,660 shares a day in the last 3 months. The fund charges an expense ratio of 47 basis points a year.
The fund holds 31 stocks in its portfolio and has a concentrated approach in the top ten holdings with 71.16% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc., Verizon Communications Inc., and Vodafone Group Plc. with asset allocation of 18.72%, 15.40% and 6.03%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 71.78%, 26.45% and 1.36% respectively. This ETF offers a dividend yield of 3.76%.
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 $1,346.40 million and an average trading volume of roughly 105,491 shares a day in the last 3 months. The fund charges an expense ratio of 10 basis points a year.
The fund holds 28 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.70% of the asset base invested in them. Among individual holdings, top three stocks in the ETF are AT&T, Verizon and Level 3 Communications Inc. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 61.80%, 23.20% and 15.00%, respectively. This ETF offers a dividend yield of 3.33%.
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 $72.20 million and an average trading volume of roughly 12,222 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.
The fund holds 52 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 25.33% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Applied Optoelectronics Inc., Infinera Corp. and Ubiquiti Networks Inc., with asset allocation of 3.45%, 2.55% and 2.52%, respectively. Communications Equipment, Integrated Telecommunications Services, Alternative Carriers and Wireless telecommunication Services are the four sectors with asset holdings of 62.21%, 15.26%, 12.92% and 9.39% respectively. This ETF offers a dividend yield of 1.23%.
iShares US Telecommunications 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 more than $474.49 million and an average trading volume of roughly 479,580 shares a day in the last 3 months. The fund charges an expense ratio of 44 basis points a year.
The fund holds 20 stocks and has a concentrated approach in the top ten holdings with 63.09% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon, and Level 3 Communications with asset allocation of 10.50%, 10.45% and 6.37%, respectively. The three major sectors of this ETF include Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers with asset holdings of 50.77%, 27.30%, and 21.86% respectively. This ETF offers a dividend yield of 2.85%.
Fidelity MSCI Telecom Services Index ETF (FCOM)
Incepted in Oct 2013, FCOM ETF tracks investment results before fees and expenses corresponds to the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth of nearly $115.80 million and an average trading volume of roughly 40,778 shares a day in the last 3 months. The fund charges an expense ratio of 8 basis points a year.
The fund holds 27 stocks and has a concentrated approach in the top ten holdings with 72.08% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon, AT&T and Level 3 Communications, with asset allocation of 23.96%, 22.88% and 4.41%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 84.91% and 13.67%, respectively. This ETF offers a dividend yield of 2.75%.
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FID-TELECOM (FCOM): ETF Research Reports
VIPERS-TELE SVC (VOX): ETF Research Reports
ISHARS-US TELE (IYZ): ETF Research Reports
SPDR-SP TELCM (XTL): ETF Research Reports
ISHARS-GLB TELE (IXP): ETF Research Reports
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