The telecommunications is often overlooked compared to other S&P 500 sectors, but size is not the only reason.
Telecom is the smallest sector in the benchmark U.S. index at a weight of 2.3%, but utilities have been afforded darling status at a weight of just 3.3%. As of Dec. 26, there was $311.1 billion allocated to sector ETFs, but a scant percentage of that is devoted to telecom ETFs. [Investors Flock to Energy ETFs]
Telecom ETFs rarely spend time in the fast lane. In fact, the Vanguard Telecommunication Services ETF (NYSEArca: VOX) is up just 2.2% this year. Lethargic performances by VOX and other telecom ETFs opened the door for the SPDR S&P Telecom ETF (NYSEArca: XTL) to be 2014’s top performing telecom ETF. XTL is the 2014 king of telecom ETFs with a gain of 5.2%.
XTL is a month away from its fourth anniversary and has cobbled $35 million in assets under management. What makes XTL unique among telecom ETFs is what stocks do not loom large within the fund.
For example, VOX allocates 44.4% of its weight Dow components Verizon (NYSE: VZ) and AT&T (NYSE: T). An equal-weight ETF, XTL allocates a mere 4.3% of its combined weight to AT&T and Verizon. The light weights to those stocks has worked in XTL’s favor this year as AT&T and Verizon are each down more than 3%, making them two of the year’s worst Dow performers.
The weakness in telecom ETFs is also surprising (and concerning) when considering the sector is considered interest rate-sensitive, but 10-year Treasury yields have tumbled this year. Rate sensitivity is where XTL could be reborn as a preferred way of gaining telecom sector exposure. [Telecom ETFs Betray Conservative Reputations]
The ETF is arguably more of a tech fund with nearly two-thirds of its weight devoted to communications equipment makers, some of which have exposure to high-growth areas of the technology sector, such as cyber security and cloud computing.
Recently, major U.S. companies, such as Home Depot (NYSE: HD), J.P. Morgan Chase (NYSE: JPM) and Target (NYSE: TGT) have been victimized by data breaches, underscoring the importance of products and services provided by cyber security providers, such as that dwell in XTL and ETFs like the PureFunds ISE Cyber Security ETF (NYSEArca: HACK).
XTL charges 0.35% per year and currently trades 4.2% above its 200-day moving average.
SPDR S&P Telecom ETF
ETF Trends editorial team contributed to this post.