Why Telecom ETFs are Beating the S&P 500
August 18th 2012 at 7:00am by Tom Lydon
Telecom stocks and exchange traded funds have been outperforming the broad market over the past quarter. Reasons for this advance have been attributed to performance-chasing, and the constant search for safe havens similar to healthcare and staples.
Telecom-focused ETFs such as the Vanguard Telecom (NYSEArca: VOX) and the iShares Dow Jones Telecom (NYSEArca: IYZ) have outpaced the S&P 500 over the past three months. For 2012, the S&P 500 has gained nearly 12%, while the telecom sector has gained rallied up about 19% this year. [Defensive ETFs for a Market Pullback]
“We can debate the reasons why telecom out-hustles the broader S&P 500 in the second quarter. Some will say it is a function of ‘sell in May and go away,’ whereby less risky segments (e.g., healthcare, staples, telecom, utilities, etc.) thrive. Others will say that it has more to do with anticipating prominent smart phone introductions and the effect that those introductions may have on the wireless data carriers,” Gary Gordon wrote for Seeking Alpha. [Telecom ETFs Undervalued: Morningstar Says]
Strong earnings reports are bolstering the sector, along with share price appreciation for companies such as Sprint Nextel (NYSE: S), AT&T (NYSE: T) and Verizon (NYSE: VZ). The search for dividend yields has drawn many investors to the telecom sector, as yields of around 3% beat out the 10-year Treasury and the S&P 500.
Gordon reminds investors that the telecom sector does tend to be a popular sector from early Spring through Fall. The past performance also indicates that the sector tends to underperform in “risk-on” markets. [Telecom ETFs Ride Level 3 Rally]
“In a market environment that has put a premium on playing defense, it is not surprising that telecommunications has been one of the top-performing sectors. Within the S&P 500, telecommunications is the smallest sector weight at just under 3.3%, but that diminutive status belies the stellar returns offered by the likes of AT&T and Verizon,” The ETF Professor wrote for Benzinga.
Tisha Guerrero 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.