Phone companies and network suppliers are finally feeling optimistic after second-quarter profits and earnings were shown to have improved over the first quarter. On the downside, Jeffry Bartash for The Wall Street Journal reports that the decline in business and unemployment has kept overall demand for telecom services low.

While telecom executives have yet to see an end to the recession, the industry believes that demand will resume by the end of this year, and should last into 2010. That’s because the industry has had to cut costs and become increasingly efficient, which means that as sales increase, margins may also rise.

Stable profits and avoidance of sharp sales declines have helped AT&T (T) and Verizon  Communications (VZ). Internet and phone service are considered “must haves” for most  people.

• iShares Dow Jones U.S. Telecommunications Sector (IYZ): up 13% year-to-date; AT&T 23.2%; Qwest 4.2%

• Merrill Lynch Telecom HOLDRs (TTH): down 4.7% year-to-date; AT&T 54.8%; Qwest 2.3%; Verizon 29.5%

For more stories about telecom, visit our telecom category.

The government will award $4 billion in loans and grants to various telecommunications firms in an attempt to expand broadband access to underserved areas across the United States, reports John Poirier of Reuters.  This is just one part of the massive $787 fiscal stimulus passed earlier this year.

President Barack Obama and the Federal Communications Commission (FCC) have made broadband access a top priority, stating that it’s vital to be on top of the technology revolution in order for the nation to remain competitive in an increasingly global marketplace.The funding will be made available to both the public and private sectors.

Many suggest that the FCC should place net-neutrality rules within the total broadband plan. Such rules would prevent broadband providers from blocking or slowing consumers’ access to legal Web content, states Grant Gross of Computer World. Net neutrality refers to a network that has no restrictions on content, sites, equipment and types of communication.

Some ETFs that could be affected as more Americans go online include:

• iShares Dow Jones U.S. Telecom (IYZ): up 9.9% year-to-date

• Broadband HOLDRs (BDH): up 43.3% year-to-date

For more stories on telecommunications, visit our telecommunication category.

Kevin Grewal contributed to this article.

Verizon Communications (VZ) has announced it will merge with Frontier Communications for $5.3 billion in stock, according to The New York Times. The deal will include 4.8 million access lines covering 14 states. It is the beginning of Verizon’s plan to tap into the wireless, FiOS fiber-optic services and other broadband development.

Cisco Systems Inc (CSCO) has won the contract to expand the high-speed wireless networks of Clearwire Corp. (CLWR) and it will create new devices for the carrier, report Kelly Riddell and Ville Heiskanen for Bloomberg. The devices will be for consumers and small/medium-sized companies, and future technologies will be implemented to boost internet traffic.

The second largest phone company in Europe Telefonica SA (TEF) reported a 9.8% increase in first quarter profits after adding emerging market customers, writes Paul Tobin for Bloomberg. Customers in Latin America are expected to generate growth for the company as operations in Europe are on the decline.

• WisdomTree International Communications (DGG): down 13.4% year-to-date; TEF is 5.9%

• iShares Dow Jones U.S. Telecom (IYZ): up 7% year-to-date; VZ is 14.8%

Max Chen contributed to this article.

Aryeh Katz for Investopedia says that there are several large-cap stocks that are yielding reasonable to very good dividends, small P/E’s with strong price momentum. But instead of picking individual stocks, why not try to capture the sector that these big companies represent to spread the risk around?

• Altria (MO): With a market cap of $35 billion and a way to operate on non-cyclical business such as tobacco and beer, the dividend yield is 7.75%. P/E multiple is at 11.45 and 66% of the company is owned by institutional investors.
• McDonald’s (MCD): A household staple that is priced to withstand the economic downfall, as well as profit in it. They currently offer investors a solid 3.68% dividend yield.  It trades with a P/E multiple of only 14.20, and 75% of this stock is owned by institutions. Usually during a down economic time, diners who would go to an upscale eatery will often choose McDonald’s (or other fast food) instead.
• Verizon (VZ): One of the nation’s largest telecommunications companies, has a market cap of $88 billion and a payout annually of 5.94%. 60% of the company is institutionally held and the P/E is very reasonable at 13.77. Shares have appreciated 30% since the market bottomed in October 2008.
  

If institutions are loading up on big names right now, isn’t that telling you something? Strong fundamentals mixed with decent pricing is presenting opportunity now. Here are some ETF that hold these stocks; note that none of them are above their long-term trend lines yet, but watch them to see what they do:

• iShares Dow Jones U.S. Telecom (IYZ): up 4.6% year-to-date; Verizon 15.85% of assets

• PowerShares Dynamic Food And Beverage (PBJ): down 2.1% year-to-date; McDonald’s 5.1%

• PowerShares Dynamic Consumer Staples (PSL): down 1.5% year-to-date; Altria 2.5% of assets

The recent market rally, which sparked the interest of many an investor, took iShares Dow Jones U.S. Telecom (IYZ) up more than 6% and has renewed interest in this sector. Telecommunication firms such as AT&T (T) and Verizon (VZ) are up for around $4.7 billion in Federal funding and are part of the larger picture when Washington is speaking of broadband efforts, says Don Dion for Seeking Alpha.

Telecom companies argue that the restrictions placed on their services through network neutrality stifle development and draw the focus away from the original purpose of the stimulus. Together, AT&T and Verizon make up 21% of the ETF IYZ, making the company news important to investors of this fund.

Both AT&T and Verizon have been exploring “smart metering” to help customers increase energy efficiency. While the new energy meters are still in the early phases, “green” initiatives from both companies could draw interested buyers as pressure builds for the development of energy-efficient technology. $565 million was proposed to be spent by AT&T in the company’s green efforts.

• iShares Dow Jones U.S. Telecom (IYZ): down 5.2% year-to-date

Kate Gibson for Yahoo Finance explains that the companies that make up the S&P 500 tallied a collective $114 billion in losses in the still-being-reported fourth quarter. The scenario would be remarkably different, and profitable, however, if just 10 companies behind $131 billion in losses were removed from the picture.

• SPDR S&P 500 (SPY) is down 22.4% year-to-date

The 10 worst losses accounted for $131 billion in losses, leaving the remaining 490 issues with positive earnings, however, how many investors actually only purchased stocks from those six issues then? While all 10 sectors of the S&P fell during the first two months of 2009, telecommunications fared the least poorly, shedding just 2.8%.

Fronting the declines in particular were energy, materials and industrials.

Some of the companies that brought the S&P 500 down include: ConocoPhillips (COP), Time Warner (TM), Merril Lynch/ Bank of America (BAC), General Motors (GM), Symantec Corp. (SYMC), among others.

• Industrial Select Sector SPDR (XLI): down 31.8% year-to-date

• iShares Dow Jones U.S. Telecom (IYZ): down 12.7% year-to-date

Despite a global recession, AT&T (T) has opted to spend $1 billion in expanding its global network, which would add greater capacity for businesses in the U.S. and overseas, reports Jeff Meisner for E-Commerce Times. It has put more than $3 billion into its network since 2006.

The network expansion will focus on Asian markets like China, India, the Philippines, Thailand and Malaysia. North American networks will also be boosted in Mexico and Puerto Rico.

While AT&T is looking optimistic, Sprint Nextel Corp. (S) reported a $1.6 billion fourth-quarter loss. Losing 1.3 million customers probably didn’t help much, and it laid off 8,000 workers, writes Antonio Perez for The Epoch Times. In the past year, Sprint lost 4.5 million subscribers; whereas, AT&T gained 2.1 million customers.

Sprint’s losses are said to be the effect of business downsizing where the number of active contracts will likely decline. Layoffs have also harmed its wireless mobile broadband market. The cause for hope is their new line of mobile phones that are set to come out later this year.

• HOLDRS Merrill Lynch Telecom (TTH): down 8.0% in the last month; 9.3% in the last three months; holdings in AT&T, 57.8%; Sprint is 1.2%

• iShares Dow Jones U.S. Telecommunications Index (IYZ): down 4.4% in the last month; up 4.8% in the last three months; AT&T is 23.1%; Sprint is 4.8%

• Vanguard Telecom (VOX): down 4.5% in the last month; up 4.7% in the last three months AT&T is 20.0%; Sprint is 4.0%

Rising Gas Prices. Martin Crutsinger for the Associated Press reports that the Labor Department said Thursday that wholesale prices increased by 0.8% last month, the biggest gain since last July and well above the 0.2% increase that economists had expected.

The main contributor to the higher inflation was a jump in gas prices by 15%, and a 3.7% surge in energy prices. Economists are predicting that inflation is not looming threat and that the recession is too deep to let it factor in.

Good News? The private sector saw a boost in economic activity, for the second consecutive month, due to the increasing money supply. Vinnee Tong for the Associated Press reports that the indicators rose 0.4%, which forecasts economic activity for the next three to six months based on 10 economic components, including stock prices, building permits and initial claims for unemployment benefits. It’s a step in the right direction, but we’re not out of the woods by a long shot. One economist said that in the second half of the year, the United States will see “anemic” growth, followed by more robust growth in 2010.

Holding the Line. Sprint Nextel Corp. (S) is not seeing a change in their real money supply, as more subscribers are lost, and $1.62 billion was taken as a fourth quarter loss. Roger Cheng for The Wall Street Journal reports that the wireless carrier lost 1.3 million subscribers in the fourth quarter – still an alarmingly high rate – but suggested the declines were stabilizing as predicted. The subscriber losses were equal to the third quarter, and left Sprint with 49.3 million customers.

• iShares Dow Jones U.S. Telecom (IYZ): down 0.5% over three months; down 4.8% over one week; Sprint is 4.8%

Producer Price Index. Treasuries are down after the recent report that the producer price increases rose by more than expected, and speculation is mounting that the Unites States may need to build yields to attract buyers at auction next week. The government will sell a record $94 billion of two-, five- and seven-year notes next week, reports Susanne Walker and Kim-Mai Cutler for Bloomberg.

The yield on the benchmark 10-year note is forecast to drop to 2.63% by March 31, according to a Bloomberg survey, and the 30-year bond yield increased to 3.63%.

• iShares Barclays 3-7 Year Treasury Bond (IEI): yields 2.8%; up 1.6% over three months; down 0.1% for one week.

As the market continues to flounder, the meticulous and perceptive investor may have noticed that there are bargains to be had on broader based indexes, writes Gary Gordon for ETF Expert. It is noted that some ETF “themes” may catch on and garner more attention when the markets recoup.

Japan. It’s the world’s second largest economy, and it’s struggling with faltering exports and low domestic consumer confidence. But a looming shift in demographics could place Japanese consumers smack in the middle of their peak spending years: 2009-2018.

Once things begin looking up again, Japan-focused ETFs to watch are:

• iShares MSCI Japan Fund (EWJ) for its large companies.

• WisdomTree Small Cap Japan Fund (DFJ) for smaller corporations that may improve more quickly.

• NETS TOPIX Index Fund (TYI) for the purists.

Telecom. Stocks have lost 50% of their values in 2008 but now they collectively have the lowest price of any economic section. Shares Dow Jones Telecom Fund (IYZ) and iShares Global Telecom Fund (IXP) both are seen as having potential opportunities for long-term investment in the next decade or so.

Shipping. The sector may be considered risky with the ETF Claymore Delta Global Shipping Index Fund (SEA) plummeting more than 50% since its introduction in September, but the those who look at the big picture will recognize that worldwide trade still relies on the shipping industry. When the markets eventually turns around, shipping will once again gain strength as countries export and import goods.

1. Use them for diversification. You don’t have to choose one stock. Google (GOOG) or Yahoo (YHOO)? Instead of choosing one or the other, you can get exposure to both and spread the risk. Technology Select Sector SPDR (XLK) holds both Google 4.6% and Yahoo 1.2%.

2. International exposure made easy. If overseas exposure is what you are after, then you can go two ways; A broad-based international funds such as Vanguard All-World ETF (VEU) gives exposure to various countries such as Canada, United Kingdom and Australia in one fund. Or a single-country fund can give the right amount of exposure for a specific need within a portfolio. iShares MSCI Austria (EWO) gives exposure to Austria and also gives a portfolio the exposure to Eastern Europe.

3. Target Specific Sectors. ETFs are great for well-rounded exposure to a certain sector. Bonds ETFs, for example, can also be used to get diversified access to an area that was once cost-prohibitive for most investors. Utilities Select Sector SPDR (XLU), iShares Dow Jones Transportation Average (IYT),  iShares Dow Jones U.S. Telecom (IYZ), CurrencyShares Japanese Yen (FXY), and iShares S&P GSCI Commodity Indexed Trust (GSG) are all examples of ETFs that give investors simple, targeted access to a specific sector.

4. Easy Flexibility. ETFs are liquid and trade throughout the day like a single stock. You can get in and out of the fund on your terms, and get pricing at all times of the trading day. It is a good idea to have a strategy when investing with anything, and for ETFs, we suggest watching the 200 day-moving-average. If a fund dips below this, or goes 8% off its high, it’s time to exit. ETFs make this easy because of their flexibility.

5. Shorting and leverage ETFs have made some of the most difficult tasks linked to investing easier. Shorting the market and leveraging your exposure is now possible through one fund. It is not foolproof, however, and the risks of shorting the market still apply. Investors need to understand them and be sure they can handle it.

6. What you see is what you invest in. You know what you’re getting when you invest in an ETF. They follow an index, so there’s no guessing. Since there is not a manager, the fees are much lower. You can also go to any provider’s site to see current holdings. Visit our provider page for easy access to the websites for all ETF providers.

7. Do your research. Although ETFs are transparent, the fact remains that a bit of your own research can go a long way. The great news here is that doing this research is easy, since everything you need to know is out in the open and readily accessible. It is recommended to research the holdings of what the ETF actually holds, as well as what the allocation is to that specific holding. Our ETF Analyzer makes this a cinch and you can do it all at one stop.