Telecom ETFs Weather the Worst 3 Months in Recent Memory

In a 3 month period of 2008 -- September, October, November -- the S&P 500 lost 30% of its value. It's nearly impossible to put that slide into context. (Those with all of their assets tied up in the U.S. stock market lost 1/3 of their account net worth... how's that for a contextual clue!)

Even if one could find a more disreputable 3-month stretch in history, one could not find a more volatile period across 90 days... not even in the 1930s. Intra-day price movement averaged 3.4% in September, 6.4% in October, and 5% in November. That's a daily range where the Dow at 8800 may have traveled more than 400 points from high to low (or vice versa)... every single day!

Internationally, the 12 weeks ending December 5 were even more unkind. The Europe 350 Index Fund (IEV) lost 35%, while the iShares MSCI Asia Pacific excluding Japan (EPP) shed 39%. One can hardly say that there was shelter to be found in stock assets.

Yet the U.S. stock market vis-a-vis the S&P 500 SPDR Trust (SPY) is, at this brief 12/8/08 wrinkle in time, more than 20% above its lows. Many people define a new bull market by a 20% rise off the lowest point reached. (See my T-Giving rally post about technical and common sense definitions of bull markets.)

Nevertheless, when putting together a potential "buy list" in this environment, I am looking at three key ingredients. These include: (a) downside risk, (b) cash flow and (c) technical strength.

First, the lower the downside equity risk, the greater the degree of relative safety. Second, the higher the amount of cash flow that the asset produces through reliable dividends, the higher the confidence one should have about projecting financial targets. And finally, there may be a potential "turning of the corner" with the ETF climbing above its short-term trendline.

When you compile a list of possibilities for incrementally purchasing back into stock assets, few investments come close to the telecom sector. Here are a few stats:

Telecom ETFs (Through 12/5/08)
			12 Week %		50-Day MA		Annual Div
Vanguard Telecom (VOX)			-24%		2.39		4.75%
iShares Dow Jones Telecom (IYZ)			-28%		0.04		4.80%
Telecom HOLDRs (TTH)			-14%		3.73		4.50%
iShares Global Telecom (IXP)			-15%		3.47		6.85%
WisdomTree Int'l Telecom (DGG)			-9%		4.3		5.60%

In most instances, the extent to which one had international exposure, the better their asset performed. iShares Global Telecom (IXP) and WisdomTree International Communications (DGG) both fell less than 1/2 the 30%+ losses that occurred for broader benchmarks.

Moreover, in most instances, international exposure provides a lift in dividend yield. With a 10-year treasury offering 2.75%, it would appear that having twice the cash flow from the telecom segment is enticing.

In all cases, domestic and international, there's evidence of technical strength with the sector rising above a 50-day moving average. Few stock ETFs have accomplished this task.

There's one additional item that requires discussion; that is, the more a telecom ETF has exposure to AT&T, the better the performance. This has helped the Telecom HOLDRs (TTH) look particularly sharp, without any international telecom companies. In fact, TTH has 50% exposure to AT&T, which is steeper than a diversified fund should ever have.

Last, but not least, whereas most of the equity market hit fresh market lows on November 20, eclipsing lows hit on October 27 and/or October 10, telecom did not. Higher lows are often a great indicator of a firmer bottom.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[drevno:]

In explaining the relatively smaller loss of the telecom ETFs versus the broader market - including the telecom equipment makers - It is important to realize the big difference between the telecom service companies and the telecom equipment makers, for instance.

The difference lies in what is offered to the consumer. Whether Joe, Mary or Ali uses iPhone or Storm or Nokia whatever is vitally important to APL or RIMM or NOK, but makes much less difference to the telecom service provider whose lines, towers, cables or switches or used in any case.

Similarly, a telecom service provider can postpone purchases of new cables or towers or other gear, making NT or Alcate-Lucent rich or disappear, but it does not work the other way around: the gear makers do not wag the service providers.

Does that make the telecoms ETFs a good buy at this time or these levels? I think so. People cannot really postpone their calls or sending their data, even though their content may have changed during the current recession. And the telecoms are postponing their capital expenditures, improving their balance sheets. And if people travel less, they use more internet for entertainment and for business. That is also good for telecoms. Demand for bandwidth is increasing, attesting to that.

2008 Dec 09 08:24 AM