The telecom sector, one of the smallest sector weights in the S&P 500 but still a favorite for investors seeking income, is scuffling this year. However, the usually slow-growth industry is experiencing changes that could bode well for long-term investors.
Telecom ETFs such as the Vanguard Telecommunication Services ETF (NYSEArca: VOX) and the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) are struggling due in part to expectations of more interest rate hikes from the Federal Reserve. The combination of the sector’s defensive posture and robust dividend yields gives telecom bond-like traits, making the group potentially vulnerable when borrowing costs climb.
International telecom stocks and exchange traded funds represent an option for yield-starved investors that are also looking to reduce their exposure to rising U.S. Treasury yields. That theme can be accessed with the iShares Global Telecomm ETF (NYSEArca: IXP).
Some analysts are bullish on big-name telecom stocks, including AT&T and Verizon, even though those stocks have run up this year. Importantly, those stocks are not stretched on valuation. However, it is AT&T and Verizon that are hampering the likes of IYZ and VOX year-to-date. Those stocks combine for significant portions of the rosters in those ETFs. In the case of VOX, the Vanguard teleom ETF, AT&T and Verizon combine for 46% of the fund’s weight.