Can Telecom ETFs Bounce Back Under Trump’s New FCC?

From Zacks: The surprising victory of Republican Donald Trump in the presidential election is starting to impact telecom policy parameters. Trump took charge of White House on Jan, 20, and will select a new Chairperson of the U.S. telecom regulatory body, the Federal Communications Commission (FCC). The Trump regime is likely to bring some relief as well as concerns for the telecom industry.

Nevertheless, the U.S. telecommunications industry is likely to witness reasonable growth through 2017. This industry has lately emerged as an intensely contested space where success depends largely on technical superiority, the quality of services and scalability. Cut-throat pricing competition may put pressure on margins. Uninterrupted advancement in telecom technologies has helped telecom operators and equipment manufacturers adopt newer business models in order to boost revenues.

Wireless network strength holds the key to overall growth of this space. As wireless networks run on radio frequency, spectrums (airwaves) have logically become the most sought after asset in the industry. Spectrum auctions conducted by the FCC, from time to time, will significantly boost network capacity. (Read: Trump & Earnings Effect—Hit & Flop ETFs of Last Week)

Key Attributes for 2017

(1) The telecommunications industry is essentially characterized by high barriers to entry. The deployment of network infrastructure requires significant capital expenditure, which very few entities can afford. Furthermore, it is not easy for a new telecom carrier to establish itself in the market as it requires government approval to transmit voice, data, and video. Such barriers protect the profits of incumbents.

(2) A major characteristic of the telecommunications industry is that it is immune to international geo-political disturbances even when these lead to economic fluctuations. This is because the need to remain connected springs from our earliest instincts to communicate with fellow human beings. Volatility in the global economy due to political and economic disturbance in the Eurozone, Asia-Pacific or the Middle-East has had little impact on the sector.

(3) Wireless network strength is the key to future growth of the overall telecom industry. As wireless networks run on radio frequency, spectrums (airwaves) are naturally the most sought after assets in the industry. Spectrum auctions conducted by the FCC from time to time will significantly boost network capacity. (Read: Fed Meeting No Shocker—Time for High Dividend ETFs?)

(4) Telecom companies offer one of the highest dividend yields in the U.S. economy. Unlike other industries, U.S. telecom operators generate their revenues predominantly in the country. This makes these stocks less susceptible to volatility in the foreign exchange rate as well as macro-economic fluctuations plaguing the rest of the world. We believe the strong dividend yield momentum will continue as the U.S. economy slowly returns to stability.

(5) Mergers and acquisitions (M&A) are not uncommon in the U.S. telecom industry. Telecom and pay-TV operators often join forces to provide better and attractive bundled products to their customers. In order to stay abreast of competition, existing players need to be constantly on their toes to introduce innovative products or merge with other companies. In the near future, the U.S. telecom industry is slated to witness further mergers and acquisitions along with product diversifications.

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 (IXPFree Report)

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 $314.21 million of assets under management and an average trading volume of roughly 31,149 shares a day in the last 3 months. The fund charges an expense ratio of 47 basis points a year.

The fund holds 32 stocks in its portfolio and has a concentrated approach in the top ten holdings with 73.06% 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 20.94%, 17.44% and 5.40%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 74.23%, 24.11% and 1.36% respectively. This ETF offers a dividend yield of 3.83%.

Vanguard Telecommunication Services ETF (VOXFree Report)

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 $1,400.00 million and an average trading volume of roughly 187,497 shares a day in the last 3 months. The fund charges an expense ratio of 10 basis points a year.

The fund holds 30 stocks in its portfolio and has a concentrated approach in the top ten holdings with 70.20% of the asset base invested in them. Among individual holdings, top three stocks in the ETF are AT&T, Verizon and T-Mobile US Inc. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 64.20%, 19.70% and 16.10%, respectively. This ETF offers a dividend yield of 3.37%.

SPDR S&P Telecom ETF (XTLFree Report)

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 $48.90 million and an average trading volume of roughly 8,232 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.

The fund holds 55 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 27.67% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Brocade Communications Systems Inc., Finisar Corp, T-Mobile US with asset allocation of 3.07%, 2.89% and 2.77%, respectively. Technology and Communications Services are the two sectors with asset holdings of 60.00% and 40.00% respectively. This ETF offers a dividend yield of 1.43%.

iShares US Telecommunications ETF (IYZFree Report)

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 $531.19 million and an average trading volume of roughly 633,959 shares a day in the last 3 months. The fund charges an expense ratio of 44 basis points a year.

The fund holds 23 stocks and has a concentrated approach in the top ten holdings with 61.11% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon, and Level 3 Communications Inc. with asset allocation of 10.65%, 10.17% and 6.01%, respectively. The three major sectors of this ETF include Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers with asset holdings of 53.40%, 27.08%, and 19.31% respectively. This ETF offers a dividend yield of 1.76%.

Fidelity MSCI Telecom Services Index ETF (FCOMFree Report)

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 $114.10 million and an average trading volume of roughly 49,023 shares a day in the last 3 months. The fund charges an expense ratio of 8 basis points a year.

The fund holds 32 stocks and has a concentrated approach in the top ten holdings with 69.03% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon, AT&T and T-Mobile US with asset allocation of 23.27%, 22.48% and 4.42%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 83.97% and 15.87%, respectively. This ETF offers a dividend yield of 2.44%.

The iShares S&P Global Telecommunications ETF (NYSE:IXP) was unchanged in premarket trading Wednesday. Year-to-date, IXP has declined -0.43%, versus a 2.42% rise in the benchmark S&P 500 index during the same period.

IXP currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #39 of 54 ETFs in the Technology Equities ETFs category.


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