The Telecom ETF Landscape

The U.S. telecommunications industry is presently riding a growth trajectory and the momentum is likely to continue in 2015 as well. Telecommunications is one of the few industries to have seen rapid technological improvement even during recession. Owing to the significance of telecommunications as an infrastructure product, we expect the overall economic dynamics to shift in the industry’s favor.

Unprecedented growth in high-speed mobile Internet traffic, in particular of wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space. Any new network standard aims at providing faster data connectivity, quick video streaming with high resolution and rich multimedia applications. The rising demand for technically superior wireless products has been the silver lining for the telecom industry in an otherwise tough environment.

The ongoing Advanced Wireless Servies-3 (AWS-3) spectrum auction being conducted by the Federal Communications Commission (FCC) has accumulated a record-breaking $44.89 billion. Unexpectedly high bidding for AWS-3 Spectrum clearly indicates that telecom operators expect the demand for mobile data and video services to rise in the future.

The FCC also plans to conduct a broadcast incentive (spectrum at the hands of TV broadcasters) auction in 2016 to ease the pressure on wireless operators. The spectrum license winners from different regions will upgrade their respective networks to gain a competitive edge.

Key Attributes for 2015

(1) The telecommunications industry is known for its huge barriers to entry. Deployment of high-speed network infrastructure requires significant capital expenditure, which very few entities can afford.

(2) The sector is immune to the sovereign debt crisis in Europe. A potential slowdown in China or any non-U.S. economic fluctuation will not have any immediately impact on this industry.

(3) U.S. telecom carriers have the option to expand globally through acquisitions or partnerships as several emerging nations are installing 3G and 4G networks rapidly.

(4) We expect telecom carriers to continue paying handsome dividends in 2015 as well. In 2014, eight major telecom and cable TV operators have paid an average dividend yield of 4.7%. Apart from traditional telecom services, carriers can also offer value-added services, such as securitized data management, cloud computing, mobile banking to name a few. These new offerings will generate considerable growth for the companies.

(5) We may see more product sharing deals between telecom, cable TV, and satellite TV operators as each of these players are trying to gain a foothold in the other’s territory. Even, pay-TV services, offerings to business enterprises, mobile backhaul and metro-Ethernet segments may witness more convergence.

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 (NYSE: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 $469.89 million of assets under management and an average trading volume of roughly 50,710 shares a day in the last 3 months. The fund charges an expense ratio of 48 basis points a year.

The fund holds 32 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.91% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications Inc. (NYSE:VZ)., AT&T Inc (NYSE:T) and Vodafone Group PLC (NASDAQ:VOD), with asset allocation of 16.37%, 14.13% and 7.37%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors with asset holdings of 75.21% and 24.55%, respectively. This ETF offers a dividend yield of 11.78%.

Vanguard Telecommunication Services ETF (NYSE: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 $847.50 million and an average trading volume of roughly 78,954 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year.

The fund holds 31 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.30% of the asset base invested in them. Among individual holdings, top stocks in the ETF are AT&T, Verizon Communications and SBA Communications Corp. (NASDAQ:SBAC). Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 61.90%, 20.00% and 18.00%, respectively. This ETF offers a dividend yield of 2.55%.

SPDR S&P Telecom ETF (NYSE: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 $29.22 million and an average trading volume of roughly 11,000 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.

The fund holds 59 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 25.00% of the asset base invested in them. Among individual holdings, top stocks in the ETF include CommScope Holding Co. Inc., Frontier Communications Corp (NASDAQ:FTR). (Class B shares) and Infinera Corporation (NASDAQ:INFN), with asset allocation of 2.86%, 2.74% and 2.61%, respectively. Communications Equipment, Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunications Services are the four major sectors with asset holdings of 62.73%, 14.79%, 11.66% and 10.82% respectively. This ETF offers a dividend yield of 1.03%.

iShares US Telecommunications ETF (NYSE: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 nearly $500.09 million and an average trading volume of roughly 267,695 shares a day in the last 3 months. The fund charges an expense ratio of 43 basis points a year.

The fund holds 25 stocks and has a concentrated approach in the top ten holdings with 67.47% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications, AT&T and CenturyLink Inc (NYSE:CTL), with asset allocation of 12.87%, 12.17% and 6.72%, respectively. The three major sectors of this ETF include Diversified Telecom Services, Wireless Telecom Services and Communications Equipment with asset holdings of 69.43%, 28.29% and 2.17% respectively. This ETF offers a dividend yield of 2.18%.

Fidelity MSCI Telecom Services Index ETF (NYSE:FCOM)

Incepted in Oct 2013, FCOM ETF tracks investment results before fees and expenses corresponds to the performance of the MSCI USA IMI (LONDON:IMI) Telecommunication Services 25/50 Index. The fund manages assets worth of nearly $83.8 million and an average trading volume of roughly 22,141 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year.

The fund holds 30 stocks and has a concentrated approach in the top-ten holdings with 69.18% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications, AT&T and Level 3 Communications Inc. (NYSE:LVLT), with asset allocation of 21.56%, 21.25% and 4.78%, respectively. Diversified

Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 80.38% and 19.52%, respectively. This ETF offers a dividend yield of 2.58%.

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