Let’s quickly clear up that headline. The exchange traded fund to be discussed here is not esoteric, obscure or unusual. It is a standard sector fund.
What is unusual about mentioning the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) as a possible beneficiary of short-covering is that it would not be the first sector fund many investors think of in this scenario. Heavily shorted stocks are often found in growth groups such as alternative energy, biotechnology and Internet. [Tepid on Telecom ETFs]
Plus, telecom stocks usually pay strong dividends, possibly subjecting shorts to increased pain when it comes time to pay dividends on borrowed shares.
While IYZ has traded slightly lower this year, the $504.5 million ETF resides just 2.3% below its 52-week high. Still, some traders are short a heavy percentage of IYZ’s weight.
Short interest in Frontier Communications (NasdaqGS: FTR) “rose 2.9% in the two-week period to February 14. Some 205.29 million shares are currently held short, representing 20.7% of the company’s float and a days-to-cover number of 21,” reports Paul Ausick for 24/7 Wall Street.
Windstream Holdings (NasdaqGS: WIN) saw its short interest increase “1% in the most recent two-week period to 92.91 million shares. That is 15.7% of the company’s float, and 12 days to cover,” according to 24/7 Wall Street. Frontier and Windstream combine for 8.4% of IYZ’s weight, according to iShares data.
News of the high short interest in Frontier and Windstream comes a week after Goldman Sachs revealed the stocks hedge funds have the largest short positions in. That group includes Dow components Verizon (NYSEArca: VZ) and AT&T with combined short interest of $10 billion as of Feb. 21. [Hedgies Short a Huge Part of the Dow ETF’s Holdings]
Those two stocks combine for 22.5% of IYZ’s weight. Rising short interest in telecommunications names comes as 10-year Treasury yields have dipped 11.5% this year. That is an important fact to remember because although telecom is viewed as an interest rate-sensitive sector, IYZ has traded slightly lower this year even as Treasury yields have declined.
On the other hand, that rate sensitivity may be overstated as IYZ was able to gain 20% last year even as Treasury yields spiked.
The Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM) is another telecom ETF that could benefit from a short-covering rally. FCOM, which debuted in October 2013, allocates almost 47% of its combined weight to Verizon, AT&T and Frontier, according to Fidelity data.
iShares U.S. Telecommunications ETF
