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After a lukewarm first half of 2017, most of the major telecommunications stocks did well in the third quarter. The new U.S. telecom regulatory body, Federal Communications Commission (FCC), has given enough indications of its leniency compared with the Obama administration. The FCC is most likely to roll back a slew of stringent regulations of the previous regime. The FCC’s stance of being less restrictive will aid mergers and acquisitions, which are likely to spur growth in 2018.

Momentum to Continue in 2018

A growing economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment. This in turn has given a boost to the demand for telecom equipment manufacturers.

Additionally, a major characteristic of the telecommunications industry is that it is immune to international geo-political disturbances even when these lead to economic fluctuations. The need to remain connected is so very human, springing from our earliest tendencies to communicate with our fellow human beings. An era of digitization and technology is essentially built on this human craving. It is here that telecommunications come to the fore as a necessary utility. Consequently, any non-U.S. economic volatility is not expected to have an immediate effect on the industry.

Furthermore, President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. Major proposals such as a pledge to spend $1 trillion in infrastructure projects over a period of 10 years, overhaul of the tax structure to reduce tax burden and easy regulatory policies, are likely to spur higher consumer spending that may create about 25 million new jobs over a decade. This in turn will fuel long-term economic growth.

A Close Watch on Net Neutrality

On August 2017, the FCC closed the window for comments and replies after receiving 22 million comments on Net Neutrality rules. The regulatory body will examine these suggestions before taking a final call. Notably, in May 2017, the FCC voted 2-1 to start the formal process of unwinding the Net Neutrality rules.

In January 2017, Trump elected existing Republican commissioner Ajit Pai as the new Chairman of the U.S. FCC. Appointment of Pai as the head of the regulatory body appears to have put Net Neutrality back on the front burner as he is a staunch Net Neutrality opponent.

Trump himself is a strong critic of Net Neutrality. There is little doubt that if the FCC scraps Net Neutrality laws either fully or partially, the ISP industry will be the major beneficiary.

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 - Free 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 $370.67 million of assets under management and an average trading volume of roughly 36,420 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 72.36% 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 17.56%, 15.30% and 6.69%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 69.98%, 28.56% and 1.19% respectively. This ETF offers a dividend yield of 3.98%.

Vanguard Telecommunication Services ETF (VOX - Free 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 $1,191.80 million and an average trading volume of roughly 136,938 shares a day in the last 3 months. The fund charges an expense ratio of 10 basis points a year.

The fund holds 27 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.70% of the asset base invested in them. Among individual holdings, top three stocks in the ETF are AT&T, Verizon and Level 3 Communications Inc. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 55.90%, 28.90% and 15.10%, respectively. This ETF offers a dividend yield of 3.78%.

SPDR S&P Telecom ETF (XTL - Free 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 $46.10 million and an average trading volume of roughly 12,227 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.

The fund holds 50 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 27.36% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Arista Networks Inc., ViaSat Inc. and Harris Corp., with asset allocation of 3.21%, 2.96% and 2.78%, respectively. Communications Equipment, Alternative Carriers, Integrated Telecommunications Services, and Wireless telecommunication Services are the four sectors with asset holdings of 64.54%, 13.39%, 12.98% and 9.09% respectively. This ETF offers a dividend yield of 1.68%.

iShares US Telecommunications ETF (IYZ - Free 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 $348.22 million and an average trading volume of roughly 345,256 shares a day in the last 3 months. The fund charges an expense ratio of 44 basis points a year.

The fund holds 20 stocks and has a concentrated approach in the top ten holdings with 66.33% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon, and CenturyLink Inc., with asset allocation of 10.66%, 10.61% and 9.19%, respectively. The three major sectors of this ETF include Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers with asset holdings of 43.10%, 28.64%, and 28.13% respectively. This ETF offers a dividend yield of 3.61%.

Fidelity MSCI Telecom Services Index ETF (FCOM - Free 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 $111.90 million and an average trading volume of roughly 33,579 shares a day in the last 3 months. The fund charges an expense ratio of 8 basis points a year.

The fund holds 27 stocks and has a concentrated approach in the top ten holdings with 70.96% 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 23.25%, 22.72% and 4.56%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 83.17% and 16.67%, respectively. This ETF offers a dividend yield of 3.42%.

 

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