The telecommunications industry is identified as a major driver of global economic recovery. Unprecedented growth in high-speed mobile Internet traffic, in particular for wireless data and video, has transformed the industry into the most evolving, inventive, and keenly contested space. In addition, the emergence of wireless broadband technology has created several new service areas, which offer huge growth potential.

Currently, the U.S. Telecommunications Industry is evolving around 5 broad factors. These include factors like, the wireless, gradually becoming the future of the telecom industry and consequently spectrum is its key word. High-speed fiber-based network is projected to expand more aggressively, especially for video/TV offerings. (Read: ETFs on the Move after Bernanke Press Conference)

In addition, consolidation within the industry will continue mainly due to shortage of airwaves and for attaining economies of scale. Innovative products will be launched in areas of m-commerce, virtualization and cloud-based technology, high-speed metro Ethernet, to name a few.

Apart from these, there still remains ample scope for expansion in the U.S. According to the Federal Communications Commission, nearly a fifth of rural American households lack broadband access.

The lack of public airwaves (spectrum) in the telecommunications industry results in a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with these large carriers. (Read: Winning ETF Strategies for the second half)

Furthermore, it is not easy to establish a new telecom carrier since it will require government approval to transmit voice, data, and video on public airwaves. Spectrum licenses are limited and therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford.

We believe the overall economic dynamics may shift in favor of the telecommunications industry as it is a major infrastructure product for both the emerging and the developed nations. Telecommunications is one of the very few industries to witness considerable technological improvement even under recession. The continuous improvement in products and networks coupled with inventions by industry players provide a major thrust to the telecommunications sector.

Moreover, growing demand for technically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Metro Ethernet, IPTV, cloud computing, managed IP services are some of the major innovations in recent times. These developments are also helping telecom equipment manufacturers, infrastructure solutions providers, and mobile phone makers to consolidate their finances. (Read: 3 Top Ranked Financial ETFs to buy now)

ETFs to Play the Sector

Against this backdrop, investors seeking to tap the growth potential of the highly competitive telecom sector may take a closer look at the ETF approach to reap maximum benefit from investing in this sector. This technique can help to spread out assets among a wide variety of companies and reduce company specific risks for a very low cost. Below, we highlight the ETFs in this sector in greater detail for Telecom ETF investors:

iShares S&P Global Telecommunications ETF (IXP)

IXP is one of the most popular Telecom ETF is this space. Launched in Nov 2001, this ETF tracks the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $483.68 million of assets under management and a trading volume of roughly 10,000 shares a day. The fund charges an expense ratio of 48 basis points a year.

The fund holds 37 stocks in its portfolio and has a concentrated approach in the top ten holdings with 69.31% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc., Vodafone group plc. and Verizon Communications Inc. with asset allocation of 16.55%, 12.21% and 11.80%, respectively.

Diversified Telecommunications Services and Wireless Telecommunications Services are the two major sectors with asset holdings of 66.58% and 32.65%, respectively. This ETF offers a dividend yield of 4.46%.

Vanguard Telecommunication Services ETF (VOX)

Another popular fund in the Telecom ETF space is VOX. Launched in Sep 2004, this ETF seeks to track the performance corresponding to the benchmark MSCI US Investable Market Telecommunication Services 25/50 Index. It has assets under management of nearly $647.9 million and a trading volume of roughly 20,000 shares a day. The fund charges an expense ratio of 14 basis points a year.

The fund holds 34 stocks in its portfolio and has a concentrated approach in the top ten holdings with 70.8% of the asset base invested in them. Among individual holdings, top stocks in the ETF are Verizon Communications, AT&T and Sprint Nextel. Integrated Telecommunications Services, Wireless Telecommunications Services and Alternative Carriers are the three major sectors with asset holdings of 61.7%, 26.8% and 11.5%, respectively. This ETF offers a dividend yield of 3.12%.

SPDR S&P Telecom ETF (XTL)

Incepted in Jan 2011, XTL ETF tries to match the returns of the S&P Telecom Select Industry Index, before expenses. The fund manages an asset size of nearly $7.15 million and a trading volume of roughly 20,000 shares a day. The fund charges an expense ratio of 35 basis points a year.

The fund holds 51 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 28.17% of the asset base invested in them.

Among individual holdings, top stocks in the ETF include NII Holdings Inc., Clearwire Corp., and ViaSat Inc. with asset allocation of 3.66%, 3.17% and 2.95%, respectively. Communications Equipment, Wireless Telecommunications Services and Integrated Telecommunication Services are the three major sectors with asset holdings of 54.54%, 20.13% and 14.75%, respectively. This ETF offers a dividend yield of 2.81%.

iShares Dow Jones US Telecom ETF (IYZ)

Incepted in May 2000, IYZ ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the Dow Jones US Select Telecommunications Index. The fund manages assets worth of nearly $454.24 million and a trading volume of roughly 139,708 shares a day. The fund charges an expense ratio of 47 basis points a year.

The fund holds 25 stocks and has a concentrated approach in the top ten holdings with 59.68% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon Communications and Sprint Nextel with asset allocation of 9.04%, 8.52% and 7.12%, respectively. Fixed Line Telecommunications and Mobile Telecommunications are the two major sectors with asset holdings of 56.50% and 43.27%, respectively. This ETF offers a dividend yield of 2.53%.

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Tickers in this Article: IXP, VOX, XTL, IYZ

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