If not for the energy sector, the telecommunications sector would be the worst-performing group in the S&P 500 this year. For example, the Vanguard Telecommunication Services ETF (NYSEArca: VOX) is lower by 11% year-to-date.
Still, exchange traded funds such as VOX sport tempting yields and some investors believe the telecommunications sector offers rebound potential. VOX has a trailing 12-month dividend yield of almost 3.4%, well above what investors will find on the S&P 500 or 10-year U.S. Treasuries.
The iShares U.S. Telecommunications ETF (NYSEArca: IYZ) is a well-known competitor to VOX. 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 telecom ETF, AT&T and Verizon combine for a massive percentage of the fund’s weight. Verizon is one of the worst-performing stocks in the Dow Jones Industrial Average this year.
“While the volatility may be higher for VOX, the high yield makes up for it for two reasons. First, dividend investors who are looking for the income are less likely to sell when prices drop. Selling on price drops, especially significant ones, is generally a losing strategy. Second, when the price drops, dividends are still being paid out. As an example, let’s say the stock price of VOX drops 5.41% in a year and SPY drops 4.43%. After including dividends, VOX comes out ahead,” according to a Seeking Alpha analysis of VOX.
Related: Time to Dial up Telecom ETFs?
Like real estate and utilities, the telecommunications sector is viewed as a bond proxy and therefore is also seen as vulnerable to rising interest rates. Of those three sectors, only telecom is lower year-to-date and the group is being thumped by utilities.
“The dividend yield is great for investors who are looking for some extra income from their portfolio. The dividend yield coming from SPY is only 1.88%. Getting almost double the yield and very comparable returns may be something dividend investors are looking for,” said Seeking Alpha of VOX.
The good news is that AT&T and Verizon, the dominant telecommunications names and the biggest holdings in the sector’s ETFs are attractively valued, a trait that is increasingly hard to find among U.S. stocks in nearly any sector.
For more news and strategy on the Telecom market, visit our Telecom category.