Time to Dial up Telecom ETFs?

It is one of the smallest sectors in the S&P 500, but this year telecommunications is a big loser. The Vanguard Telecommunication Services ETF (NYSEArca: VOX) and the iShares U.S. Telecommunications ETF (NYSEArca: IYZ) are down an average of 9%. Only energy has performed more poorly this year than the telecom sector.

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.

“For the most of the past five years, telecommunication [stocks]have been written off by sell-side [analysts]and investors, which isn’t surprising given the competitive industry structure and price wars,” wrote Thomas Lee, Fundstrat’s U.S. portfolio strategist in a note published late June. Crystal Kim of Barron’s reported on and posted the Fundstrat note. “A rash of equity analyst downgrades in the past year has pushed the mean rating to the lowest in a decade, leaving telecom stocks with the lowest mean rating, lowest price-to-earnings multiple (12X), highest dividend yield (5.1%).”