Top-Heavy Telecom ETF IYZ Vies for Federal Stimulus Dollars

As Monday’s rally rejuvenated investors, shares of the iShares Dow Jones U.S. Telecommunications Index Fund (IYZ) jumped more than 6%. The broader market rally attracted interest to the fund, which more than doubled its three-month average trading volume by the end of trading on March 23. IYZ has also been making a gradual advance in the Sector Momentum Tracker rankings, moving from the No. 33 spot on January 20 to the No. 23 position on March 17.

As telecommunications firms vie for a piece of the $4.7 billion federal funding pie, the sector, and IYZ, will be interesting areas to watch in upcoming months. IYZ tracks the Dow Jones U.S. Select Telecommunications Index, which uses a passive indexing strategy to track the telecommunications subset of the market. The stocks that compose the index are concentrated in fixed-line communications and wireless communications. The fund is rebalanced quarterly, with the latest rebalance having taken place on March 24. The latest adjustments slightly increased the fund’s positions in top components AT&T (T) and Verizon (VZ) while slightly decreasing its position in Sprint (S).

Telecommunication firms, such as IYZ components AT&T and Verizon, have become active members of the discussion in Washington regarding how the $4.7 billion in federal broadband funds should be spent in upcoming months. The network neutrality principle, which has found support within the current administration, dictates that Internet providers treat all Internet content as equal. If the network neutrality principles were to be abandoned when appropriating the $4.7 billion investment, certain companies such as those in IYZ’s basket could be affected in the aftermath.

Telecom companies argue that the restrictions placed on their services through network neutrality stifle development and draw the focus away from the original purpose of the stimulus. “The idea that we should lay additional and unknown regulations on top of the task of the people getting this grant money is, I think, troubling at best,” noted Jonathan Banks of the U.S. Telecom Association during a meeting at the U.S. Department of Commerce. Chris Guttman-McCabe, representing wireless carriers, said that net neutrality detracts from the original purpose of the stimulus funds: “creating the most jobs and helping reverse the recession.”

Public advocacy groups argue that network neutrality rules are what have made the Internet so successful as a creative and educational tool. Ben Scott, who serves as policy director of Free Press, a media reform group, noted, “The federal government is not a charity; it is an investor.” Scott also emphasized the importance of spending oversight, noting that “taxpayers put money into broadband infrastructure only insofar as it serves the public interest. It’s not a blank check.”

AT&T, IYZ’s largest component, constitutes more than 21% of the fund, making company-specific news important to IYZ investors. Shares of the telecom giant have rebounded strongly this month, jumping nearly 20% from March 9 to March 23. At the center of much of the government tech fund debate, AT&T has grabbed the headlines in March with other innovations. Earlier this month AT&T announced that it will spend $565 million over 10 years to make its corporate vehicle fleet more green. Company officials noted that this investment would be the biggest of its kind.

In a move that could draw more investors into AT&T’s fold, the company recently announced that it would offer the new version of the iPhone, premiering this summer, without its previously required two-year contract. The phones, which will be locked to AT&T service and sell at a significant premium, could draw a significant amount of attention back to T shareholders if the plan is successful.

Both AT&T and Verizon, IYZ’s second-largest holding, have been exploring “smart metering” to help customers increase energy efficiency. While the new energy meters are still in the early phases, “green” initiatives from both companies could draw interested buyers as pressure builds for the development of energy-efficient technology. Together, VZ and T make up more than 36% of IYZ, so interested investors might benefit from checking their total portfolios for potential overlap.

IYZ, benefiting from the fund’s methodology as well as the legacy of the iShares sector ETFs, offers tech investors exposure to the sector and reasonable liquidity. While other tech ETFs, like PXQ, have made faster advances in our momentum rankings, the investor interest attracted by IYZ makes the fund stand apart for buy-and-hold investors. As with any ETF, however, investors should examine as many factors as possible when delving into a sector fund during an economically volatile period.

Comments

[dc1:]

Hi Don,

Thanks for the post. This is what I look for at Seekingalpha.com.

Mar 27 12:19 PM