Quick Investor Guide To Telecom ETFs

telecomThe telecommunications industry is identified as a major driver of global economic recovery. Unprecedented growth in high-speed mobile Internet traffic, in particular for wireless data and video, has transformed the industry into the most evolving, inventive, and keenly contested space. In addition, the emergence of wireless broadband technology has created several new service areas, which offer huge growth potential.

Currently, the U.S. Telecommunications Industry is evolving around 5 broad factors. These include factors like, the wireless gradually becoming the future of the telecom industry and consequently spectrum is gaining popularity. High-speed fiber-based network is projected to expand more aggressively, especially for video/TV offerings.

In addition, consolidation within the industry will continue mainly due to shortage of airwaves and for attaining economies of scale. Innovative products will be launched in areas of m-Commerce, virtualization and cloud-based technology, high-speed metro Ethernet, to name a few. Apart from these, there still remains ample scope for expansion in the U.S.  According to the Federal Communications Commission (FCC), nearly a fifth of rural American households lack broadband access. (Read: 4 Unbeatable Strategies for Q4)

The lack of public airwaves (spectrum) in the telecommunications industry creates a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with large carriers. Furthermore, it is not easy to establish a new telecom carrier since it will require government approval to transmit voice, data, and video on public airwaves. Spectrum licenses are limited and therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford.

We believe the overall economic dynamics may shift in favor of the telecommunications industry as it is a major infrastructure product for both the emerging and the developed nations. Telecommunications is one of the very few industries to witness considerable technological improvement even under recession. The continuous improvement in products and networks coupled with inventions by industry players provide a major thrust to the telecommunications sector.

Moreover, growing demand for technically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Metro Ethernet, IPTV, cloud computing, managed IP services, m-commerce, m-banking, telematics services are some of the major innovations in recent times. These developments are also helping telecom equipment manufacturers, infrastructure solutions providers, and mobile phone makers to consolidate finances.

ETFs to Tap the Sector

Below, we highlight ETFs in this sector in greater detail for Telecom ETF investors:

iShares S&P Global Telecommunications ETF (NYSEARCA: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 $493.88 million of assets under management and an average trading volume of roughly 78,860 shares a day in the last 3 months. The fund charges an expense ratio of 48 basis points a year.

The fund holds 36 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.98% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc., Vodafone group plc. and Verizon Communications Inc. with asset allocation of 14.81%, 13.69% and 11.07%, respectively. Diversified Telecommunications Services and Wireless Telecommunications Services are the two major sectors with asset holdings of 66.29% and 33.37%, respectively. This ETF offers a dividend yield of 3.91%.

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