It is hard not to feel sorry for telecom exchange traded funds. Compared other sector ETFs, funds such as the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) and the Vanguard Telecommunication Services ETF (NYSEArca: VOX), simply do not attract investor attention or assets on par with financial services, healthcare or technology funds.
There is a reason to consider to consider telecom ETFs and it comes by way of former Dow component AT&T (NYSE: T). That might be a hard pill for some investors to swallow. Shares of AT&T are up 43.2% over the past five years, less than half the 92.7% gained by the S&P 500 over the same period. Many investors have viewed AT&T’s steadily rising dividend and now fat yield of 5.2% as the stock’s lone source of allure. [Politicians Love Stocks in These ETFs]
“At least yields more than U.S. Treasurys” has arguably the conventional wisdom surrounding AT&T in recent years. That could be set to change as the company puts the finishing touches on its acquisition of DirecTV (NasdaqGS: DTV).
“We have seen this dance many times in our careers – that is, when a company buys another one and the new forward cash flow that is generated from the synergies helps delever the balance sheet and secure a very large dividend for years to come, real money buys in hand-over-fist for weeks on end in the hope that they just found a company whose EPS has flat-lined for years, and will now grow 10%-20% over the next 6 to 18 months,” said Rareview Macro founder Neil Azous in a note out Wednesday.
Azous adds that once AT&T wraps up its DirecTV buy, it’s only a matter of time before Wall Street analysts rush to upgrade the stock and it to various “favorite ideas” and “conviction” lists. That movement has already started. On Wednesday, Oppenheimer reiterated an outperform rating on AT&T while boosting its price target on the stock to $40 from $36.
Investors looking for robust AT&T exposure without single-stock commitment can turn to ETFs. For example, IYZ allocates nearly 11% of its weight AT&T, making the stock the $494.9 million ETF’s largest holding. IYZ does not sport a dividend yield on par with AT&T, but 2.2% is fair.
If IYZ’s AT&T exposure is not enough, VOX is a suitable alternative. The Vanguard telecom ETF had a weight to AT&T of 22.7% at the end of May, according to Vanguard data.
The Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM) tops its rivals with a 23.2% AT&T allocation. And those looking for another, albeit odd catalyst, for AT&T, consider the recent track record of stocks expelled from the Dow. Alcoa (NYSE: AA), Bank of America (NYSE: BAC) and Hewlett-Packard (NYSE: HPQ), the last three stocks booted from the Dow, are up an average of 32% since leaving the index in September 2013. [Telecom ETFs Pinched by AT&T Exit]
Fidelity MSCI Telecommunication Services Index ETF