Reflective of its status as the smallest sector in the S&P 500, there is not an overabundance of telecommunications exchange traded funds.
Despite the dearth of telecom ETFs, the sector has been in the spotlight recently amid a spate of mergers and acquisitions activity, though mostly of the unrealized variety. Last week, telecom ETFs came under pressure on news Sprint (NYSE: S) was giving up on its effort to acquire T-Mobile (NYSE: TMUS), the unit of Germany’s Deutsche Telekom (OTC: DTEGY).
The Vanguard Telecommunication Services ETF (NYSEArca: VOX) was among the affected funds, but VOX’s story is not over just because Sprint and T-Mobile could consummate a deal. [Sprint’s Slide Pressures Telecom ETFs]
Dividends play a role in luring investors to telecom stocks, like Dow components AT&T (NYSE: T) and Verizon (NYSE: VZ). The same holds true of ETFs like VOX.
“One reason some investors are drawn to telecom firms relates to dividends, as some large, best-in-class telecom firms have offered above-average dividend yields and have had the capital and cash-generating ability to meet their near-term obligations and maintain dividend payments. This fund’s dividend yield and annual payout have displayed some volatility during the past decade. Some telecom firms, such as AT&T and Verizon and their predecessors, have had stable or rising dividends for decades,” according to Morningstar analyst Robert Goldsborough.
VOX, the largest telecom ETF, allocates an arguably excessive 44% of its combined weight to AT&T and Verizon. However, T-Mobile and Sprint, both of which could now find themselves to be takeover targets, combine for 6.2% of the ETF’s weight.
Additionally, VOX devotes 2.7% of its weight to Windstream Holdings (NasdaqGS: WIN), which recently said it will spin-off its telecom network business into a publicly traded real estate investment trust (REIT). [Windstream Lifts Telecom ETFs]