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Market Overview

Making A Call With Telecom ETFs

Making A Call With Telecom ETFs

Perhaps due to the sector's bond-like qualities, a disadvantage at a time when investors widely expect te Federal Reserve to boost interest rates, the telecom sector is lagging this year. For example, Dow component Verizon Communications Inc. (NYSE: VZ) is lower by more than 6 percent year-to-date.

Investors typically embrace telecom stocks and the related exchange traded funds as defensive dividend ideas. Despite the sector's recent struggles, some analysts view telecom slightly more favorably than other low beta, high yield groups.

“CFRA’s investment policy committee recommends a marketweight exposure to the telecom services sector, in contrast to underweighting views on other high-yielding equity sectors such as consumer staples, real estate or utilities,” CFRA Research said in a note out Tuesday.

A Look At The ETFs

Year-to-date, the iShares U.S. Telecommunications ETF (NYSE: IYZ) and the Vanguard Telecommunication Services ETF (NYSE: VOX) are lower by 5.4 percent and 4.1 percent, respectively. Verizon's slack performance is hindering both ETFs. VOX allocates 20.7 percent of its weight to Verizon, while IYZ has a 9.7 percent weight to the stock.

CFRA has buy ratings on five telecom stocks, including Verizon rival AT&T Inc. (NYSE: T). Last week, the firm upped its ratings on Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NASDAQ: TMUS) to Buy from Hold.

“Last week, CFRA equity analyst Angelo Zino upgraded to buy, from hold, his recommendation on Sprint Corp and T-Mobile US,” said CFRA. “According to Zino, the S upgrade primarily reflects a view that the company will see healthy subscriber growth despite recent unlimited plan offerings from larger carriers. For TMUS, Zino expects the carrier to be very aggressive with promotions/marketing efforts for the next generation iPhone launch in September and sees additional share gain ahead. In both cases, Zino sees the stocks undervalued on an enterprise value/EBITDA basis.”

T-Mobile and Sprint combine for over 11 percent of IYZ's lineup. VOX's combined weight to those stocks was 8 percent at the end of January.

The Fidelity MSCI Telecommunications Services ETF (NYSE: FCOM) has a comparable lineup to VOX and is lower by 4.7 percent this year. FCOM is the least expensive telecom ETF with an annual fee of just 0.084 percent.

CFRA has Market Weight ratings on FCOM and VOX and an Underweight rating on IYZ.


Related Articles (VOX + FCOM)

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