Telecom ETFs Look To Turn Things Around In Q2 (VOX)

From Zacks: U.S. telecommunications industry had a disappointing 2017. However, signs of improvement were apparent from fourth-quarter 2017 with most of the major telecommunications stocks starting to perform well.

Notably, all four national wireless carriers have gained postpaid subscribers in the last reported quarter.

Upcoming 5G Wireless Network

Fifth-generation (5G) superfast wireless networks will provide primary impetus to the telecom industry. In September 2017, Moody’s Investors Service stated in a report that the evolution towards 5G wireless networks will result in higher capital spending for the U.S. wireless carriers. We expect wireless networks to provide primary impetus to the telecom industry. In this regard, Internet of Things (IoT) has the potential to emerge the numero uno factor for future growth in the space.

Major Positives

Several positives emerged for the telecom industry since the last quarter of 2017. President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.  Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as the President. We believe that the telecom industry will be one of the major beneficiaries of this policy change.

On Dec 14, 2017, in a landmark decision, the U.S. telecom regulator Federal Communications Commission (“FCC”) repealed the Net Neutrality laws that it had imposed under the Obama regime. There is little doubt that the ISP industry will be the major beneficiary after FCC repeals Net Neutrality. Lenient regulatory attitude of current FCC may also pave the way for new merger and acquisition deals between ISPs and online digital media companies.

The proposal to reduce corporate tax rate from 35% to 21% would be immediately accretive to cash flowof the telecom carriers. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and deployment.

The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure. Major proposals such as a pledge to spend $1 trillion in infrastructure projects over a period of 10 years along with the above-mentioned policy changes are likely to spur higher consumer spending.

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 (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 $304.45 million of assets under management and an average trading volume of roughly 33,118 shares a day in the last 3 months. The fund charges an expense ratio of 48 basis points a year.

The fund holds 30 stocks in its portfolio and has a concentrated approach in the top ten holdings with 71.96% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc., Verizon Communications Inc., and Vodafone Group Plc. with asset allocation of 18.40%, 16.48% and 6.28%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 71.14%, 27.32% and 1.31% respectively. This ETF offers a dividend yield of 3.68%.

Vanguard Telecommunication Services ETF (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 $970.6 million and an average trading volume of roughly 133,527 shares a day in the last 3 months. The fund charges an expense ratio of 10 basis points a year.

The fund holds 23 stocks in its portfolio and has a concentrated approach in the top ten holdings with 72.70% of the asset base invested in them. Among individual holdings, top three stocks in the ETF are Verizon, AT&T and CenturyLink Inc. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 60.40%, 22.70% and 16.40%, respectively. This ETF offers a dividend yield of 5.16%.

SPDR S&P Telecom ETF (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 $119.52 million and an average trading volume of roughly 29,081 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.

The fund holds 46 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 27.52% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Oclaro Inc., Lumentum Holdings Inc. and Ubiquiti Networks Inc., with asset allocation of 3.40%, 2.71% and 2.71%, respectively. Communications Equipment, Alternative Carriers, Integrated Telecommunications Services, and Wireless telecommunication Services are the four sectors with asset holdings of 64.42%, 13.22%, 11.58% and 10.77% respectively. This ETF offers a dividend yield of 2.21%.

iShares US Telecommunications ETF (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 more than $308.78 million and an average trading volume of roughly 325,429 shares a day in the last 3 months. The fund charges an expense ratio of 44 basis points a year.

The fund holds 45 stocks and has a concentrated approach in the top ten holdings with 66.26% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Cisco Systems Inc. and Verizon with asset allocation of 15.28%,

15.05% and 14.40%, respectively. The four major sectors of this ETF include Communications Equipment, Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers with asset holdings of 50.10%, 32.05%, 7.95%, and 7.78% respectively. This ETF offers a dividend yield of 4.69%.

Fidelity MSCI Telecom Services Index ETF (FCOM)

Incepted in Oct 2013, FCOM ETF tracks investment results before fees and expenses corresponds to the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth of nearly 110.60 million and an average trading volume of roughly 45,169 shares a day in the last 3 months. The fund charges an expense ratio of 8 basis points a year.

The fund holds 24 stocks and has a concentrated approach in the top ten holdings with 73.34% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon, AT&T and T-Mobile US Inc., with asset allocation of 25.53%, 22.41% and 4.79%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 80.32% and 19.52%, respectively. This ETF offers a dividend yield of 3.81%.

The Vanguard Telecommunication Services ETF (VOX) was unchanged in premarket trading Monday. Year-to-date, VOX has declined -8.21%, versus a -1.39% rise in the benchmark S&P 500 index during the same period.

VOX currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #46 of 61 ETFs in the Technology Equities ETFs category.


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