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Dialing up a Popular Telecom ETF

ETFtrends.com

Reflective of its status as the smallest sector in the S&P 500, there is not an overabundance of telecommunications exchange traded funds.

Despite the dearth of telecom ETFs, the sector has been in the spotlight recently amid a spate of mergers and acquisitions activity, though mostly of the unrealized variety. Last week, telecom ETFs came under pressure on news Sprint (NYSE: S) was giving up on its effort to acquire T-Mobile (TMUS), the unit of Germany’s Deutsche Telekom (DTEGY).

The Vanguard Telecommunication Services ETF (VOX) was among the affected funds, but VOX’s story is not over just because Sprint and T-Mobile could consummate a deal. [Sprint's Slide Pressures Telecom ETFs]

Dividends play a role in luring investors to telecom stocks, like Dow components AT&T (NYSE: T) and Verizon (VZ). The same holds true of ETFs like VOX.

“One reason some investors are drawn to telecom firms relates to dividends, as some large, best-in-class telecom firms have offered above-average dividend yields and have had the capital and cash-generating ability to meet their near-term obligations and maintain dividend payments. This fund’s dividend yield and annual payout have displayed some volatility during the past decade. Some telecom firms, such as AT&T and Verizon and their predecessors, have had stable or rising dividends for decades,” according to Morningstar analyst Robert Goldsborough.

VOX, the largest telecom ETF, allocates an arguably excessive 44% of its combined weight to AT&T and Verizon. However, T-Mobile and Sprint, both of which could now find themselves to be takeover targets, combine for 6.2% of the ETF’s weight.

Additionally, VOX devotes 2.7% of its weight to Windstream Holdings (WIN), which recently said it will spin-off its telecom network business into a publicly traded real estate investment trust (REIT). [Windstream Lifts Telecom ETFs]

None of that means VOX is solely focused on large-, mega- and mid-cap companies. In fact, the ETF has a surprising amount of micro-cap exposure.

“Of the nearly 30% of VOX’s assets that are devoted to small-cap companies, a clear majority (some 25% of the fund’s total assets) is invested in micro-cap names. That has had the effect of making VOX more volatile than one might expect–and slightly more volatile than the typical large-cap fund. During the past five years, VOX has had a volatility of return of 14.3% compared with 13.4% for the S&P 500 and 16.2% for a competing iShares ETF,” according to Morningstar.

The rival iShares fund is the $571 million iShares U.S. Telecommunications ETF (IYZ) . IYZ charges 0.43% per year, slightly more than triple the 0.14% fee on VOX.

However, VOX does face a credible threat on the fee front in the form of the Fidelity MSCI Telecommunication Services Index ETF (FCOM) , which charges just 0.12% per year. [Fidelity's Rapid ETF Ascent]

“In general, the major domestic telecom ETFs have highly correlated performance. VOX’s performance has shown a 96% correlation to IYZ’s performance during the past five years,” according to Morningstar.

Vanguard Telecommunication Services ETF

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