5 Reasons Why I Like Vanguard’s Telecom ETF

After nearly 4 years, retail investors have begun to exit low-yielding investment grade bonds for the perceived potential of stocks. This “rotation” of money flow into equity funds is putting pressure on fund managers to keep pace with the broader benchmarks. In other words, if they hold back cash in the hopes of a better buying opportunity, the broader S&P 500 may run away from them.

So the markets move higher on good news. They move lower on bad news in the morning, yet quickly recover in the afternoon as institutional dollars pursue “bargains” of 0.5% over more substantive price pullbacks.

In truth, complacency hasn’t taken over just yet. The percentage of S&P 100 stocks over a 200-day trendline is roughly at 80%. Over the last 3 years, complacency has more commonly been associated with 85%-90%. And the premier contrarian indicator, the equity put-call ratio, has yet to demonstrate a dearth of short-sellers (0.35). In essence, there may still be room to run.

That said, I already have plenty of broad market exposure. It is protected with stop-limit loss orders. And my money management clients are unlikely to benefit from chasing.

The answer in my silver-and-gold-lined playbook is to pursue a low cost ETF that is less volatile than the S&P 500, has more yield than both the S&P 500 as well as an intermediate-term investment grade bond benchmark, is less correlated to the S&P 500 than most sectors of the economy and presents compelling potential for capital appreciation.

That may be a tall order. Then again, I think that Vanguard Telecom (VOX) fits the description nicely. And I recently talked about my plans for telecom, and other 2013 portfolio positions, in this December interview.

Here are 5 reasons why I like VOX right this minute.

1. Beta risk is lower than the S&P 500. Beta risk typically describes the correlated volatility of an ETF in relation to the S&P 500, or another significant benchmark. In the case of VOX, it carries a beta of 0.65, or roughly 2/3 the volatile price movement of the S&P 500. In the same manner that some investors like the slow-n-steady pace of the utilities segment, VOX offers less of the roller-coaster experience that has been unnerving for so many participants.

2. Relative Strength Index (RSI) readings are in the middle of the range. The last 2 times that the S&P 500 was hitting the top of its RSI range was mid-September and late March; both preceded the sharpest sell-offs for stocks in 2012. It follows that many relative strength watchers prefer to pick up assets at the lower end or middle of the RSI range. Vanguard Telecom (VOX) is smack dab in the middle.

3. Economic demand is improving. Gartner, a premier info tech researcher, believes that telecom services spending will rise 2.4% in 2013. In fact, the company is calling for a significant rebound, expressing optimism that Americans will continue to satiate their appetite for info tech involving telecom. Naturally, there is an array of broader tech ETFs that might capture a wider pick-up in IT spending and the capital appreciation of shares that might come with it. Nevertheless, few ETFs will offer the “cap app” potential alongside a more robust yield.

4. Speaking of a 3.5% yield. Like the utilities sector, the telecom sector is known for reliable and above-average dividends. Unlike utilities, telecom is not historically overvalued, nor is it as price sensitive to rising bond yields. VOX currently offers 3.53% and has an expense ratio of a mere 0.14%. The yield is 160 basis points higher than the 10-year and 140 basis points greater than the dividend of the SPDR S&P 500 Trust (SPY), making VOX very desirable in the ultra-low rate environment.

5. Consistent technical support at its long-term trendline. Since early February of 2012, VOX has tested its 200-day moving average on 3 separate occasions. Each time, the technical trend proved resilient. This fact does not imply that telecom will never sink or that it is impenetrable. It simply tells me that, when it is struggling, yield-hunters or dip-buyers have been stepping up to the purchasing plate.


Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.