Telecommunications is not the most glamorous of the 10 sectors tracked by the S&P 500. In fact, at 2.34%, telecom is the smallest sector weight in the benchmark U.S. index. Consumer discretionary accounts for more than five times the S&P 500’s weight than does telecom.
There is a well-known trade-of f with telecom stocks and exchange traded funds. Investors sacrifice growth for decent yields, dependable dividends and the comfort of knowing their cash is parked in a low volatility sector. [Sector Trends Reveal Investors are Turning Defensive]
Said another way, it is not surprising that in strong bull markets, telecom ETFs have lagged. In 2013, the iShares U.S. Telecommunications ETF (IYZ) and the Vanguard Telecommunication Services ETF (VOX) are each up 18%, or nearly 900 basis points below the returns offered by the S&P 500.
Investors do not have to commit to market-lagging returns with telecom ETFs, a fact confirmed by the SPDR S&P S&P International Telecommunications Sector ETF (IST) . With just $34 million in assets under management, IST is another example of a small ETF offering big returns. Actually, IST has performed well enough this year to rank among the short list of international ETFs that have outpaced the S&P 500. [Some International ETFs Have Beaten SPY in 2013]
IST truly lives up to its international billing as the U.S. is nowhere to be found in the fund and that is a good thing. U.S. telecom ETFs have seen their laggard status grow as 10-year Treasury yields have surged. Since April 30, VOX is up just 2.9%, placing it among scores of income-generating ETFs that have been pinched due to their sensitivity to rising rates. [Low Vol ETFs Take Their Lumps]
On the other hand, IST has jumped 14.1% since April 30, a time frame in which 10-year Treasury yields soared 71.2%. AT&T (NYSE: T) and Verizon (VZ) may be vulnerable to rising interest rates in the U.S., but an ETF that allocates over two-thirds of its weight to the U.K., Japan, France, Spain and Germany will be less so and IST affirms as much.
Speaking of rates, IST’s trailing 12-month yield is almost 3.3%, about 40 basis points higher than the yield on 10-year Treasuries and the dividend yield on VOX.
Additionally, IST offers further capital appreciation potential because of its 20.5% weight to Vodafone (VOD), a company that some industry observers believe is takeover bait after shedding its stake in Verizon Wireless earlier this year.
SPDR S&P International Telecommunications Sector ETF