Normally defensive telecom stocks and the corresponding exchange traded funds are proving immune to Friday’s downdraft in U.S. equities.
News that the venerable Dow Jones Industrial Average will part ways with AT&T (NYSE: T) in favor of Apple (NasdaqGS: AAPL) after the close of trading on March 18 is pressuring AT&T-heavy ETFs such as the iShares U.S. Telecommunications ETF (NYSEArca: IYZ), which is lower by 1.6%.
The rival Vanguard Telecommunication Services ETF (NYSEArca: VOX) is lower by 1.5% while the Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM) is off 1.6%. Those declines are understandable. AT&T, with a market value of about $174 billion or less than Apple’s cash hoard, is also lower by 1.5% though off its worse levels of the day. [Politicians Love Stocks in These ETFs]
The stock accounts for 12% of IYZ. The $888.6 million VOX allocated a staggering 21.8% of its weight to AT&T at the end of January, according to Vanguard data. FCOM, the newest of the telecom ETFs, had a 22.6% weight to AT&T as of March 5.
Whether by way of the old American Telephone & Telegraph Co. or its current incarnation, AT&T has been a member of the Dow since 1939, so it is arguably surprising the Dow is parting ways with the telecom giant.
Perhaps even more surprising is that as a price-weighted index, it would have been logical to assume that if the Dow is going to add a new member at the expense of another, Intel (NasdaqGS: INTC), Cisco (NasdaqGS: CSCO) and General Electric (NYSE: GE) would have been candidates for expulsion before AT&T. Coming into Friday, all had smaller weights than AT&T in the Dow and the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA). [Apple Coming to the Dow]
AT&T shareholders and investors in FCOM, IYZ and VOX may not be sad over the stock’s departure from the Dow for too long because history shows stocks that leave the blue chip index go on to deliver stellar returns.
Alcoa (NYSE: AA) nearly doubled in its first year out of the Dow. Hewlett-Packard (NYSE: HPQ) surged 73.4% in its first year out of the index while shares of Altria (NYSE: MO) are up nearly 143% in the seven years since the tobacco giant left the Dow, according to CNBC.
Fidelity MSCI Telecommunication Services Index ETF