The U.S. telecommunications industry is likely to witness reasonable growth through 2016. This industry has lately emerged as an intensely contested space where success thrives largely on technical superiority, the quality of services and scalability. Cut-throat pricing competition may put pressure on margins. Nevertheless, uninterrupted advancement in telecom technologies has helped telecom operators and equipment manufacturers adopt newer business models in order to boost revenues.
4G LTE Momentum Continues
According to a research report published by the Global Mobile Suppliers Association (GSA), the number of LTE subscribers worldwide has crossed the 1 billion mark. In the fourth quarter of 2015 alone, LTE subscriptions grew by over 156 million. At this rate, 4G LTE is set to outnumber 3G (all forms of 3G technologies) subscribers globally by 2020. GSA further stated that in 2015 alone, 4G LTE generated a net 552.2 million subscription worldwide, reflecting a whopping 107% improvement year over year. (Read: Telecom ETFs Falling on Lackluster Earnings)
Upcoming 5G Wireless Technology
Several industry researchers hold that 5G network will provide a download speed of 1 Gbps (gigabit per second), which is 200 times the throughput of the currently available standard 4G LTE network. Latency period of data delivery will be in single milliseconds. Further, 5G technology is designed to be more power efficient than any other standard wireless networks available these days. Naturally, 5G-enabled mobile devices are likely to last much longer than their 3G or 4G counterparts.
Mobile Video Business Gaining Traction
Internet TV is gradually gaining a strong foothold in the U.S. The legacy pay-TV industry in the country has been facing severe competition from online video streaming service providers. The low-cost over-the-top video streaming service has resulted in massive cord cutting that is currently threatening the pay-TV business model. (Read: Homebuilding ETFs on Upbeat Data)
Internet TV has emerged as a strong alternative to counter this competitive threat. At present, the web-based digital media market is growing rapidly. The digital media brands are gradually gaining significant market traction especially among the young generation. With demand for smartphones and tablets on the rise, target customers are increasingly watching videos online, preferring them over costlier legacy pay- TV connections.
Online Digital Advertisement: The New Growth Driver
Advertisement on the mobile video platform is gradually shifting from simple selling of banner ads on the mobile web to automated or programmatic ad selling. Pay- TV operators are gradually adopting the data-driven advertising technique that is already popular in the web-based advertisement arena. To derive maximum synergy from the combined video content and video distribution platform, these companies are extensively penetrating into the advertising technology market. Inclusion of dynamic ad-insertion, targeted audience advertising and data-driven TV advertisements are steps toward the same objective. (Read: Fed to Hike in June; ETF Moves to Consider)
ETFs to Tap 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 Global Telecommunications ETF (IXP)
IXP is one of the most popular Telecom ETF available in the market. Launched in Nov 2001, this ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $417.40 million of assets under management and an average trading volume of roughly 47,505 shares a day in the last 3 months. The fund charges an expense ratio of 47 basis points a year.
The fund holds 47 stocks in its portfolio and has a concentrated approach in the top ten holdings with 71.47% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc (NYSE:T)., Verizon Communications Inc (NYSE:VZ)., and Vodafone Group (LON:VOD) Plc. with asset allocation of 18.63%, 16.10% and 6.58%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 73.04%, 25.42% and 1.17% respectively. This ETF offers a dividend yield of 3.63%.
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 $1,513.90 million and an average trading volume of roughly 164,998 shares a day in the last 3 months. The fund charges an expense ratio of 10 basis points a year.
The fund holds 30 stocks in its portfolio and has a concentrated approach in the top ten holdings with 68.90% of the asset base invested in them. Among individual holdings, top three stocks in the ETF are AT&T, Verizon and CenturyLink Inc (NYSE:CTL). Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 65.60%, 21.80% and 12.60%, respectively. This ETF offers a dividend yield of 3.77%.
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 $22.40 million and an average trading volume of roughly 9,998 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.
The fund holds 60 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 25.15% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Ubiquiti Networks Inc., NetScout Systems Inc. and CommScope Holding Co. Inc. with asset allocation of 2.71%, 2.62% and 2.57%, respectively. Communications Equipment, Integrated Telecommunication Services, Alternative Carriers, Wireless Telecommunications Services, Internet Software & Services are the five major sectors with asset holdings of 59.13%, 16.76%, 14.71%, 8.28% and 0.82% respectively. This ETF offers a dividend yield of 1.47%.
iShares US Telecommunications 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 $670.01 million and an average trading volume of roughly 453,942 shares a day in the last 3 months. The fund charges an expense ratio of 45 basis points a year.
The fund holds 27 stocks and has a concentrated approach in the top ten holdings with 60.38% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon, and SBA Communications Corp (NASDAQ:SBAC). with asset allocation of 10.92%, 10.12% and 5.76%, respectively. The five major sectors of this ETF include Integrated Telecom, Wireless Telecom, Alternative Carriers, Communications Equipment and Internet Software & Services with asset holdings of 51.01%, 22.92%, 19.54%, 3.75% and 2.68% respectively. This ETF offers a dividend yield of 1.96%.
Fidelity MSCI Telecom Services Index ETF (FCOM)
Incepted in Oct 2013, FCOM ETF tracks investment results before fees and expenses corresponds to the performance of the MSCI USA IMI (LON:IMI) Telecommunication Services 25/50 Index. The fund manages assets worth of nearly $162.80 million and an average trading volume of roughly 52,102 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year.
The fund holds 32 stocks and has a concentrated approach in the top ten holdings with 68.90% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon and Level 3 Communications Inc. with asset allocation of 22.34%, 21.14% and 4.26%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 86.12% and 13.83%, respectively. This ETF offers a dividend yield of 2.27%.
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Zacks Investment Research
4G LTE Momentum Continues
According to a research report published by the Global Mobile Suppliers Association (GSA), the number of LTE subscribers worldwide has crossed the 1 billion mark. In the fourth quarter of 2015 alone, LTE subscriptions grew by over 156 million. At this rate, 4G LTE is set to outnumber 3G (all forms of 3G technologies) subscribers globally by 2020. GSA further stated that in 2015 alone, 4G LTE generated a net 552.2 million subscription worldwide, reflecting a whopping 107% improvement year over year. (Read: Telecom ETFs Falling on Lackluster Earnings)
Upcoming 5G Wireless Technology
Several industry researchers hold that 5G network will provide a download speed of 1 Gbps (gigabit per second), which is 200 times the throughput of the currently available standard 4G LTE network. Latency period of data delivery will be in single milliseconds. Further, 5G technology is designed to be more power efficient than any other standard wireless networks available these days. Naturally, 5G-enabled mobile devices are likely to last much longer than their 3G or 4G counterparts.
Mobile Video Business Gaining Traction
Internet TV is gradually gaining a strong foothold in the U.S. The legacy pay-TV industry in the country has been facing severe competition from online video streaming service providers. The low-cost over-the-top video streaming service has resulted in massive cord cutting that is currently threatening the pay-TV business model. (Read: Homebuilding ETFs on Upbeat Data)
Internet TV has emerged as a strong alternative to counter this competitive threat. At present, the web-based digital media market is growing rapidly. The digital media brands are gradually gaining significant market traction especially among the young generation. With demand for smartphones and tablets on the rise, target customers are increasingly watching videos online, preferring them over costlier legacy pay- TV connections.
Online Digital Advertisement: The New Growth Driver
Advertisement on the mobile video platform is gradually shifting from simple selling of banner ads on the mobile web to automated or programmatic ad selling. Pay- TV operators are gradually adopting the data-driven advertising technique that is already popular in the web-based advertisement arena. To derive maximum synergy from the combined video content and video distribution platform, these companies are extensively penetrating into the advertising technology market. Inclusion of dynamic ad-insertion, targeted audience advertising and data-driven TV advertisements are steps toward the same objective. (Read: Fed to Hike in June; ETF Moves to Consider)
ETFs to Tap 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 Global Telecommunications ETF (IXP)
IXP is one of the most popular Telecom ETF available in the market. Launched in Nov 2001, this ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $417.40 million of assets under management and an average trading volume of roughly 47,505 shares a day in the last 3 months. The fund charges an expense ratio of 47 basis points a year.
The fund holds 47 stocks in its portfolio and has a concentrated approach in the top ten holdings with 71.47% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc (NYSE:T)., Verizon Communications Inc (NYSE:VZ)., and Vodafone Group (LON:VOD) Plc. with asset allocation of 18.63%, 16.10% and 6.58%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 73.04%, 25.42% and 1.17% respectively. This ETF offers a dividend yield of 3.63%.
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 $1,513.90 million and an average trading volume of roughly 164,998 shares a day in the last 3 months. The fund charges an expense ratio of 10 basis points a year.
The fund holds 30 stocks in its portfolio and has a concentrated approach in the top ten holdings with 68.90% of the asset base invested in them. Among individual holdings, top three stocks in the ETF are AT&T, Verizon and CenturyLink Inc (NYSE:CTL). Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 65.60%, 21.80% and 12.60%, respectively. This ETF offers a dividend yield of 3.77%.
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 $22.40 million and an average trading volume of roughly 9,998 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.
The fund holds 60 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 25.15% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Ubiquiti Networks Inc., NetScout Systems Inc. and CommScope Holding Co. Inc. with asset allocation of 2.71%, 2.62% and 2.57%, respectively. Communications Equipment, Integrated Telecommunication Services, Alternative Carriers, Wireless Telecommunications Services, Internet Software & Services are the five major sectors with asset holdings of 59.13%, 16.76%, 14.71%, 8.28% and 0.82% respectively. This ETF offers a dividend yield of 1.47%.
iShares US Telecommunications 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 $670.01 million and an average trading volume of roughly 453,942 shares a day in the last 3 months. The fund charges an expense ratio of 45 basis points a year.
The fund holds 27 stocks and has a concentrated approach in the top ten holdings with 60.38% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon, and SBA Communications Corp (NASDAQ:SBAC). with asset allocation of 10.92%, 10.12% and 5.76%, respectively. The five major sectors of this ETF include Integrated Telecom, Wireless Telecom, Alternative Carriers, Communications Equipment and Internet Software & Services with asset holdings of 51.01%, 22.92%, 19.54%, 3.75% and 2.68% respectively. This ETF offers a dividend yield of 1.96%.
Fidelity MSCI Telecom Services Index ETF (FCOM)
Incepted in Oct 2013, FCOM ETF tracks investment results before fees and expenses corresponds to the performance of the MSCI USA IMI (LON:IMI) Telecommunication Services 25/50 Index. The fund manages assets worth of nearly $162.80 million and an average trading volume of roughly 52,102 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year.
The fund holds 32 stocks and has a concentrated approach in the top ten holdings with 68.90% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon and Level 3 Communications Inc. with asset allocation of 22.34%, 21.14% and 4.26%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 86.12% and 13.83%, respectively. This ETF offers a dividend yield of 2.27%.
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Zacks Investment Research
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