ETF Trends
ETF Trends

Telecommunications is not the most glamorous of the 10 sectors tracked by the S&P 500. In fact, at 2.34%, telecom is the smallest sector weight in the benchmark U.S. index. Consumer discretionary accounts for more than five times the S&P 500’s weight than does telecom.

There is a well-known trade-of f with telecom stocks and exchange traded funds. Investors sacrifice growth for decent yields, dependable dividends and the comfort of knowing their cash is parked in a low volatility sector. [Sector Trends Reveal Investors are Turning Defensive]

Said another way, it is not surprising that in strong bull markets, telecom ETFs have lagged. In 2013, the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) and the Vanguard Telecommunication Services ETF (NYSEArca: VOX) are each up 18%, or nearly 900 basis points below the returns offered by the S&P 500.

Investors do not have to commit to market-lagging returns with telecom ETFs, a fact confirmed by the SPDR S&P S&P International Telecommunications Sector ETF (NYSEArca: IST). With just $34 million in assets under management, IST is another example of a small ETF offering big returns. Actually, IST has performed well enough this year to rank among the short list of international ETFs that have outpaced the S&P 500. [Some International ETFs Have Beaten SPY in 2013]

IST truly lives up to its international billing as the U.S. is nowhere to be found in the fund and that is a good thing. U.S. telecom ETFs have seen their laggard status grow as 10-year Treasury yields have surged. Since April 30, VOX is up just 2.9%, placing it among scores of income-generating ETFs that have been pinched due to their sensitivity to rising rates. [Low Vol ETFs Take Their Lumps]

On the other hand, IST has jumped 14.1% since April 30, a time frame in which 10-year Treasury yields soared 71.2%. AT&T (NYSE: T) and Verizon (NYSE: VZ) may be vulnerable to rising interest rates in the U.S., but an ETF that allocates over two-thirds of its weight to the U.K., Japan, France, Spain and Germany will be less so and IST affirms as much.

Speaking of rates, IST’s trailing 12-month yield is almost 3.3%, about 40 basis points higher than the yield on 10-year Treasuries and the dividend yield on VOX.

Additionally, IST offers further capital appreciation potential because of its 20.5% weight to Vodafone (NYSE: VOD), a company that some industry observers believe is takeover bait after shedding its stake in Verizon Wireless earlier this year.

SPDR S&P International Telecommunications Sector ETF