Roger Nusbaum submits: Does Morningstar have it right this time? Uh, well, no they don't... On November 25 Morningstar issued a report on the Vanguard Telecom VIPERs (NYSEARCA:VOX). Their take was negative, which is OK, but their reasoning was a new one on me.
Their beef is that the fund has dramatically outperformed its benchmark index, which on the surface is strange but there is a reasonable explanation provided in the report. The underlying index is flawed in that it violates IRS rules about stock concentration in mutual funds. As a result, VOX owns less baby bells than the index.
Morningstar is also critical that 2/3 of the assets are in the top ten holdings. If that is important (and I'm not saying it isn't), it might also be important for Morningstar to mention that roughly 3/4 of iShares Telecom (NYSEARCA:IYZ) is also in its top ten and iShares Global Telecom (NYSEARCA:IXP) has about 2/3 of assets in its top ten. This just in: A lot of sector funds are concentrated in this manner.
The report also contends that because of the deviations from the index it makes it "hard to gauge how well the squad is tracking telecom services stocks." I don't really know what that last sentence means but I do know that both VOX and IYZ have about 18% in Verizon and are with in two percentage points of having the same weight in the new AT&T so I don't think it would be that difficult. Lately though, VOX has dramatically out performed IYZ which, although I'm not sure, might be due to VOX's average market cap of $12 billion compared to an average cap size of $33 billion for IYZ.
If VOX has outperformed because of cap size issues, that makes it not so hard to gauge. VOX will lag IYZ by a little bit when large cap beats mid and small cap. Maybe.
I think reading these reports can be a great way to learn. They can be a starting point with some facts and some un-insightful thought. From there, I think do-it-yourselfers can add their own common sense to decide whether a particular fund is useful or not.
- Other Seeking Alpha Network articles by Roger Nusbaum.
- The complete list of ETFs and closed-end funds (and links to articles about them) covered by ETF Investor.
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