It may be the smallest sector weight in the S&P 500 at just 2.64%, but the telecommunications is known for being home to robust payouts and yields. The sector, as is the case with the utilities group, is also capital-intensive and, for that reason, believed to be vulnerable rising interest rates.
Recent gains by the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) and the Vanguard Telecom Services ETF (NYSEArca: VOX) indicate the telecom dividend thesis is trumping vulnerability to rising rates. As utilities ETFs have fought back in the face of rising rate fears, IYZ and VOX have done the same and then some. [Rising Rates Dim Utilities ETFs]
Even with a noticeable dip in mid-June, the $450.7 million IYZ is up almost 3.4% in the past month and closed Thursday less than 70 cents below its 52-week high. VOX has been even more impressive, gaining 4.4% in the past 30 days. On Thursday, VOX climbed almost 1.2% on volume that was 50% above the ETF’s daily average. The Vanguard offering closed less than 20 cents below its 52-week high. [Telecom ETFs Outpacing Broader Market]
Thursday’s action could be a sign that telecom stocks are poised to rally after Federal Reserve Chairman Ben Bernanke assured investors that U.S. interest rates will remain low for the foreseeable future. The Fed has previously said it will not consider interest rate hikes until the unemployment rate dips below 6.5%. By some estimates, it would take the addition of at least 200,000 jobs per month into 2016 for the jobless rate, currently 7.6%, to drop below 6.5%.
Should the Fed keep its word on the interest rate front, borrowing costs for the likes of AT&T (NYSE: T) and Verizon (NYSE: VZ), the two largest holdings in both IYZ and VOX, will remain low, potentially further stoking investor interest in these ETFs. [Telecom ETFs Ride Market Rally]