Telecom ETFs Undervalued, Morningstar Says
November 1st 2011 at 1:17pm by Tom Lydon
While the telecommunications sector has been trailing the broader market, U.S. telecom exchange traded funds show promising dividends, attractive valuations and sturdy component holdings, says investment researcher Morningstar.
The U.S. telecommunications sector has become a mature industry, shedding the high leverage, weak profitability and uncertain growth that use to characterize the sector, writes Robert Goldsborough, ETF analyst at Morningstar.
The industry, led by giants like AT&T (NYSE: T) and Verizon (NYSE: VZ), is focusing on society’s move toward wireless gadgets and internet usage, which has boosted demand for smartphones and mobile broadband devices.
The sector has fallen behind the broader market so far this year, but the industry has remained on hold, at least until the AT&T and T-Mobile deal either goes through or breaks apart.
“Investors who have seen the market’s recent pullback (and, particularly, its recent punishment of telecom firms) but want to avoid single-stock risk, should consider a telecom ETF,” Goldsborough said. “Currently, three ETFs focus solely on U.S. telecom firms. All three trade significantly below Morningstar’s fair value estimates for the funds.”
The ETFs include:
- iShares Dow Jones US Telecom (NYSEArca: IYZ). IYZ is the largest and most liquid of the three. The fund holds fixed-line, wireless and tower companies. The ETF is also heavily weighted in its top 10 holdings, which make up 71% of assets, with AT&T at 19% and Verizon at 14%. IYZ has an expense ratio of 0.47%.
- Vanguard Telecom Services ETF (NYSEArca: VOX). VOX holds 70% of assets in its top 10 holdings, with AT&T and Verizon each at 23%. The ETF has an expense ratio of 0.24%. The fund has also shown a 98% correlation with IYZ over the last three years.
- Focus Morningstar Communications Services ETF (NYSEArca: FCQ). FCQ is the smallest and most thinly traded of the three. Still, the fund boasts a cheap 0.19% expense ratio. This fund, unlike the other two, includes cable company holdings. Around 74% of the fund’s total assets make up the top 10 holdings. The fund also has a higher weighting to high-quality companies, compared to IYZ and VOX.
iShares Dow Jones US Telecom
For more information on the telecom sector, visit our telecommunications category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.