What’s Got the Telecom ETFs Down?

 |  Includes: AMX, CHL, IXP, S, T, VOX, VZ
by: Tom Lydon

Hello? … Hello? There must be a bad connection – the telecommunications sector has been the worst sector in the S&P 500 year-to-date and telecom ETFs aren’t faring much better. But there’s opportunity if you know where to look.

Why have telecom ETFs been lagging so much? There are a few good reasons behind this:

  • The telecommunications market in the United States is a mature one. Few people lack a phone of some sort, which means there’s not much room for explosive growth here.
  • Competition in the wireless market is intense and getting more intense. If you want to be a major player on the wireless front, you’ve got to bring it and your growth will be hard-won.
  • Some companies are focused on landline technology, and they’re on a downtrend as wireless comes more into favor.

But don’t ditch telecom yet – for income-oriented investors, many major telecom companies such as AT&T (NYSE: T), Sprint (NYSE: S) and Verizon (NYSE: VZ) are stable and paying dividends. All three are major holdings in Vanguard Telecom Services (NYSEArca: VOX), which is down 0.7% year-to-date.

Surely the telecom sector is growing somewhere, right? Right.

  • Overseas is actually where most of the growth is expected to take place in the next few years. According to the Wall Street Journal, projected cell phone revenue between 2007 and 2012 is 96% in China and India; 53% in Africa and the Middle East and 42% in Latin America. Developed markets, like Western Europe, are projected to see about 13% growth.
  • And here’s some food for thought: the world’s richest person, Carlos Slim Helu, holds a controlling interest in some telecom companies. This includes America Movil (NYSE:AMX), Latin America’s largest mobile phone business.

With competition this fierce, there are few ways to tell which of the growing telecom companies will join the giants. Instead of stock-picking, ETFs will give you exposure to the entire sector, which has potential in the coming years.

iShares S&P Global Telecom (NYSEARCA:IXP) includes a mix of established telecom providers like Verizon and AT&T along with rapidly growing emerging market providers, like China Mobile (NYSE: CHL) and America Movil. This fund is sitting just a hair above its trend line right now, but given the numbers showing where the growth in telecom is likely to be, this fund could give you well-rounded exposure if you want to invest in the sector.

Disclosure: None