Dialing Up ETFs

But even as the outlook for the industry’s two behemoths appears stable, it may be unwise to have too much industry exposure on just those firms. That’s a flaw of the Vanguard Telecommunications Services ETF (VOX) and the Fidelity MSCI Telecommunication Services ETF (FCOM). Verizon and AT&T make up more than 40 percent of these cap-weighted portfolios. The iShares U.S. Telecommunications ETF (IYZ) keeps that combined exposure at around 20 percent. 

Thanks to its more diversified portfolio, the iShares fund may be the best proxy among those three large telecom funds for value investors, though its expense ratio of 0.44 percent is significantly more than the comparable Fidelity and Vanguard funds at 0.08 percent and 0.10 percent, respectively. 

If yield is your chief criteria, then direct investments in Verizon and AT&T may make better choices than the funds because they both have a roughly 5 percent dividend yield. In contrast, the iShares U.S. Telecommunications ETF, which owns many lower-yielding telecoms, has a 3.3 percent 30-day SEC yield. The Fidelity MSCI Telecommunications Services ETF has a 3.7 percent yield, while the Vanguard Telecommunication Services ETF has a 3.5 percent yield. That’s still notably better than 2.26 percent 10-Year Treasury yield. 

A Different Approach

Investors may look to skip direct exposure to the established legacy telecom operators and instead try to capture some of the dynamic opportunities being created by today’s whiz-bang telecom technologies. 

In a 2017 industry outlook, Deloitte notes that U.S. consumers now look at their smartphones more than nine billion times per day, up 13 percent from last year. And they see a string of drivers for telecom and technology in coming years. They think the looming trend towards the Internet of Things, which will have billions of sensors in place, will drive telecom traffic.

And they note that “wearables, connected cars, smart homes (e.g., lighting, security, entertainment), and the government and enterprise-connected ‘things’ such as smart businesses (e.g., fleet management), and smart cities (e.g., parking, city lighting, asset monitoring and tracking, and video security)—are likely areas of growth in the coming years.”

An option for tapping into that kind of broad-based exposure is the First Trust Nasdaq Smartphone Index Fund (FONE). Despite a fairly stiff 0.70 percent expense ratio, this fund is more of a pure play on mobile telecom services, software and hardware, and it tracks an underlying index of firms as determined by the Consumer Technology Association. 

Roughly 90 percent of the fund is earmarked for handset firms and mobile software applications, with the remainder invested in telecom network providers. Smart phone makers Sony and Apple, for example, are among the fund’s top holdings, as are a broad range of telecom chip firms, such as Texas Instruments and Micron Technology.