ETF Research written by the Barchart.com ETF Research Team

Last Updated: August 12, 2011

Table of Contents

1. Introduction
2. U.S. Telecom ETFs
3. Short and Leveraged Telecom ETFs
4. Global Telecom
   

Introduction

Telecommunications Services is one of the sector groups as defined by the Global Industry Classification Standard (GICS), along with other top-level sectors such as Information Technology, Utilities, Energy, Financials, and others.  Telecom is one of the smallest sectors and is broken down into only two Industry groups:  Diversified Telecommunications Services and Wireless Telecommunications Services. 

Prior to the advent of wireless phones, the telecom industry was easily recognized by landline phone companies such as AT&T and the Baby Bells.  However, technology brought us wireless phones and blurred the lines between what defines a telephone company.  Customers can now get their telecom services from a traditional landline company, a wireless company, a voice-over-Internet phone company such as Vonage, or a cable company such as Comcast.  The bottom line is that the telecom industry is being subsumed by the larger category of digital communications where communications involve multiple applications such as TV, phone, and web access. 

Telecom in our view should actually be an industry segment under the Technology sector rather than a sector onto itself.  For the time being, however, the GICS codes consider Telecom to be a separate sector and we will therefore analyze this sector on a standalone basis.

We will first provide a quick description of the ETFs in the Telecom sector and then provide our picks for the sector.

U.S. Telecom ETFs

iShares Dow Jones US Telecommunications Sector Index Fund (IYZ) (issuer web site link) – This fund, launched in May 2000, has $600 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the Dow Jones U.S. Select Telecommunications Index.  The fund holds 31 U.S.-listed stocks.  The five top holdings are:  AT&T (16.0%), Verizon (12.7%), American Tower Corp (7.1%), CenturyLink (6.9%), and Crown Castle (5.2%).

Vanguard Telecommunication Services ETF (VOX) (issuer web site link) – This fund, launched in September 2004, has $330 million in assets under management.  The fund has an expense fee of 0.24%.  The fund tracks the MSCI US Investable Market Telecommunication Services 25/50 Index.  The fund holds 37 U.S.-listed stocks.  The five top holdings are:  Verizon (23.1%), AT&T (22.9%), American Tower Corp (4.4%), CenturyLink  (4.3%), and Sprint Nextel (4.2%).

Short and Leveraged Telecom ETFs

There is one leveraged long Telecom ETF, which is the  ProShares Ultra Telecommunications ETF (LTL) (issuer web site link).  However, this fund has only $3 million in assets despite having been launched more than three years ago in March 2008.  We recommend staying away from this fund due to doubts about its longevity. 

There is one short Telecom ETF, which is the  ProShares UltraShort Telecommunications (TLL) (issuer web site link).  However, this fund has only $2 million in assets despite having been launched in March 2008.  As with the long version of this fund, we recommend staying away from this fund due to doubts about its longevity.

Global Telecom

iShares S&P Global Telecommunications Sector Index Fund (IXP) (issuer web site link) – This fund, launched in November 2001, has $390 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the S&P Global Telecommunications Sector Index, which is a subset of the Standard & Poor's Global 1200 Index.  The fund holds 39 globally-listed stocks.  The five top holdings are:  AT&T (15.8%), Vodafone Group (12.6%), Verizon Communications (9.2%), Telefonica  (7.4%), and China Mobile (4.6%).

SPDR S&P International Telecommunications Sector ETF (IST) (issuer web site link) – This fund, launched in July 2008, has $9 million in assets under management.  The fund has an expense fee of 0.50%.  The fund tracks the S&P Developed Ex-U.S. BMI Telecommunication Services Sector Index.  The fund holds 59 U.S.-listed stocks.  The five top holdings are:  Vodafone Group (20.6%), Telefonica (11.9%), Deutsche Telekom (6.0%), Softbank Corp  (4.9%), and France Telecom (4.3%).

iShares MSCI ACWI ex-U.S. Telecommunication Services Sector Index Fund (AXTE) (issuer web site link) – This fund, launched in July 2010, has $2 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the MSCI All-Country World ex-USA Telecommunications Services Index.  The fund holds 69 globally-listed stocks.  The five top holdings are:  Vodafone Group (15.0%), Telefonica (9.4%), China Mobile (6.2%), America Movil Sab  (5.2%), and France Telecom (4.0%).

Figure 1:  Vanguard Telecommunication Services ETF (VOX) versus iShares Dow Jones US Telecommunications Sector Index Fund (IYZ) (live web link)

Our Picks in the Telecom ETF sector – In the U.S.-listed Telecom sector, our pick is the Vanguard Telecommunication Services ETF (VOX) because it has a lower fee and better performance than its main competitor, the iShares Dow Jones U.S. Telecommunications Sector Index Fund (IYZ).  Vanguard's VOX has a lower fee of 0.24% as compared with the iShares IYZ fee of 0.48%.  In addition, Vanguard's VOX has consistently outperformed the iShares IYZ as seen in Figure 1.  The only caveat we have about Vanguard's VOX fund is that it has a heavy weight on Verizon (23.1%) and AT&T (22.9%), which together account for 46% of the fund at present.  Therefore the performance of VOX will heavily depend on the performance of Verizon and AT&T.  If either or both of those stocks perform poorly, then VOX may well underperform iShares' IYZ.  Click on the "live web link" in the Figure 1 heading above to obtain a live Barchart.com monthly comparison chart of the two funds, and then use the “Frequency” pull-down menu switch to Weekly, Daily or Intraday comparisons.

Figure 2:  iShares S&P Global Telecommunications Sector Index Fund (IXP) versus Vanguard Telecommunication Services ETF (VOX) (live web link)

For the overall Telecom ETF sector, however, our pick is the iShares S&P Global Telecommunications Sector Index Fund (IXP).  We chose the iShares Global Telecom ETF over the U.S.-listed Vanguard's VOX because IXP has better performance as seen in Figure 2.  In addition, the investment case for IXP looking ahead is much stronger than for VOX.  The U.S. telecom industry is saturated and phone companies are basically fighting over a fixed number of customers.  However, the telecom industry is growing quickly in developing countries around the world.  We therefore believe investors are well-advised to focus on global telecom companies rather than on just U.S.-based telecom companies.

By the Barchart.com ETF Research Team
Last Updated:  8/12/2011

ETP's mentioned: IYZ, VOX, LTL, TLL, IXP, IST, AXTE

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