Currently, the U.S. telecommunications Industry is evolving around five broad factors. These include wireless gradually becoming the future of the telecom industry and the consequent popularity of spectrum. High-speed fiber-based network is projected to expand more aggressively, especially for video/TV offerings. (Read: Profit from this top ranked Municipal Bond ETFs—MLN)
In addition, consolidation within the industry will continue mainly due to shortage of airwaves and attainment of economies of scale. Innovative product launches are expected 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.
While the telecom growth momentum is expected to be maintained in the U.S. over the near term, the major impetus is likely to come from the emerging markets of China, India, Brazil and Russia. Carrier expenditures have increased in Japan and even major telecom operators in Western Europe, the most economically vulnerable region, have raised their budgets. (Read: May ETF Asset Report: Bond Funds Soar, U.S. Equities Suffer)
Despite the massive growth in fiber-to-the-home networks, we believe that wireless networks will boost growth in the telecom industry. Apart from the terrestrial wireless network, the U.S. has an advanced satellite broadband network, mobile satellite radio systems and extensive WiFi networks. In 2014, the Asia-Pacific region is likely to excel all other regions in the world with respect to LTE base-stations installation. LTE base-stations, which are popularly known as radio access networks (RAN), are expected to grow eight fold in the region this year.
The U.S. telecom industry is likely to witness more mergers and acquisitions in 2014. Owing to the rising demand for scarce and valuable wireless spectrum, mergers and acquisitions have increased exponentially. While established players need more spectrums to gain competitiveness, small players prefer to collaborate with strong rivals rather than trying to establish a nationwide foothold which is extremely capital intensive.
The telecom infrastructure developer’s market is witnessing a technical change globally. So far the main thrust of the communications service providers was on developing advanced hardware, which would enable them to attain enhanced speed, scalability and reliability. However, recent developments suggest that operators are gradually shifting focus from a hardware centric growth model to an IT/software centric business model. The primary reason behind this shift is the significant growth of cloud-based virtual networking. (Read: 3 Top Ranked Value ETFs to Buy Now)
Growth of software-defined networking (SDN) and network function virtualization (NFV) encouraged newly emerging digital media companies to invest heavily in the communications infrastructure market. SDN provides customers increased bandwidth utilization, higher reliability and reduced capital spending. NFV is designed to consolidate and deliver the networking components needed to support a fully virtualized infrastructure – including virtual servers, storage and even other networks. It utilizes standard IT virtualization technologies.
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. (See all telecom ETFs here)
iShares Global Telecommunications ETF (IXP - ETF 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 $490.34 million of assets under management and an average trading volume of roughly 46,217 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 69.27% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications Inc., AT&T Inc. and Vodafone group plc. with asset allocation of 16.11%, 14.91% and 7.62%, respectively. Diversified Telecommunications Services, Wireless Telecommunications Services and Other are the three major sectors with asset holdings of 70.13%, 24.12% and 5.75%, respectively. This ETF offers a dividend yield of 3.35%.
Vanguard Telecommunication Services ETF (VOX - ETF 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 $690.7 million and an average trading volume of roughly 53,775 shares a day in the last 3 months. The fund charges an expense ratio of 14 basis points a year.
The fund holds 31 stocks in its portfolio and has a concentrated approach in the top ten holdings with 74.30% of the asset base invested in them. Among individual holdings, top stocks in the ETF are AT&T, Verizon Communications and CenturyLink Inc. Integrated Telecommunications Services, Wireless Telecommunications Services and Alternative Carriers are the three major sectors with asset holdings of 67.20%, 18.10% and 14.70%, respectively. This ETF offers a dividend yield of 3.72%.
SPDR S&P Telecom ETF (XTL - ETF 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 $19.25 million and an average trading volume of roughly 4,600 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.
The fund holds 58 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 24.87% of the asset base invested in them. Among individual holdings, top stocks in the ETF include CenturyLink Inc., Frontier Communications Corp., and Level 3 Communications Inc. with asset allocation of 2.67%, 2.57% and 2.55%, respectively. Communications Equipment, Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunications Services are the four major sectors with asset holdings of 60.95%, 14.76%, 13.90% and 10.40%, respectively. This ETF offers a dividend yield of 0.68%.
iShares US Telecommunications ETF (IYZ - ETF 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 nearly $614.61 million and an average trading volume of roughly 313,822 shares a day in the last 3 months. The fund charges an expense ratio of 46 basis points a year.
The fund holds 24 stocks and has a concentrated approach in the top ten holdings with 63.78% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon Communications and CenturyLink Inc. with asset allocation of 8.94%, 8.71% and 7.61%, respectively. The three major sectors of this ETF include Fixed Line Telecommunications, Mobile Telecommunications and Technology Hardware & Equipment with asset holdings of 61.73%, 36.30% and 2.15% respectively. This ETF offers a dividend yield of 2.69%.
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