This is not your grandfather’s telecommunications sector. In fact, it is not even called telecom or telecommunications anymore. Earlier this year, MSCI Inc. and Standard & Poor’s, two of the largest providers of indexes for use by exchange-traded funds (ETFs) and index funds, reconfigured the old telecom sector into the new communication services group.
Gone are the days when AT&T (NYSE:T) and Verizon (NYSE:VZ) dominated telecom funds. These days, telecom ETFs have a growth feel because the aforementioned sector reconfiguration included moving a slew of stocks from the consumer discretionary and technology sectors over to the communication services group.
Today, telecom ETFs are dominated by the likes of Facebook (NASDAQ:FB) and Google parent Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL).
For investors looking to tap into the growth proposition offered by the communication services sector, here are some of the best telecom ETFs to consider.
Communication Services Select Sector SPDR (XLC)
Expense Ratio: 0.13% per year, or $13 on a $10,000 investment.
This telecom ETF is the first fund dedicated to the communication services sector. The Communication Services Select Sector SPDR (NYSEARCA:XLC) debuted in June, ahead of the official launch of the sector itself. XLC has around $3 billion in assets under management, easily making it one of the most successful ETFs to come to market in 2018.
XLC holds 26 stocks, but this is a top-heavy telecom ETF, as Facebook and the two share classes of Alphabet combine for over 40% of the fund’s weight.
“This new sector includes fast-growing media and entertainment companies from the Discretionary and Tech sectors, plus Telecom, dominated by Facebook and Alphabet,” said AltaVista Research. “However the outlook has diminished considerably in recent months, resulting in a reduction in the long-term EPS growth forecast from 12.5% to 10.6% and declining analyst sentiment. However, recent price declines have now made valuations look attractive in our opinion”
Vanguard Communication Services ETF (VOX)
Expense Ratio: 0.1%
Rather than launch a new ETF for the communication services sector, Vanguard opted to adjust the Vanguard Communication Services ETF (NYSEARCA:VOX), which previously existed as a more traditional telecom ETF.
VOX “includes stocks of companies that provide telephone, data-transmission, cellular, wireless communication services and offer related content and information through various media,” according to Vanguard.
This telecom ETF holds 110 stocks, but like the aforementioned XLC, VOX is top heavy. The top 10 holdings in this Vanguard fund combine for almost 70% of its weight. Those stocks include Facebook, Alphabet, Verizon and Netflix (NASDAQ:NFLX).
Fidelity MSCI Communication Services ETF (FCOM)
Expense Ratio: 0.084%
Fidelity offers the least-expensive sector ETFs, and that group includes its telecom ETF, the Fidelity MSCI Communication Services ETF (NYSEARCA:FCOM). FCOM, which has nearly $183 million in assets under management, targets the MSCI USA IMI Communication Services 25/50 Index.
This telecom ETF, like its aforementioned peers, is cap-weighted so it’s comparably top heavy. Facebook, the two share classes of Alphabet and Verizon combine for nearly 46% of FCOM’s roster.
Most of this telecom ETF’s holdings are classified as large-cap value stocks. Fidelity clients can realize additional cost savings with FCOM because the telecom ETF is available on Fidelity’s commission-free ETF platform.
Global X MSCI China Communication Services ETF (CHIC)
Expense Ratio: 0.65%
Global X recently unveiled a major expansion to its lineup of China sector ETFs, a group that includes the Global X MSCI China Communication Services ETF (NASDAQ:CHIC). This new telecom ETF tracks the MSCI China Communication Services 10/50 Index.
Like domestic telecom ETFs, CHIC mixes slower-growing traditional telecom stocks with fast-growing internet and technology fare. Another benefit if CHIC is that Chinese sectors have traditionally shown fairly low correlations to the equivalent U.S. groups.
“This suggests sectors react differently to risks (e.g., geopolitical tensions with the U.S.) and return drivers (e.g., growing domestic consumption),” according to Global X. “In addition, correlations between Chinese sectors and their U.S. counterparts are low, demonstrating that they aren’t driven by the same risks and returns either.”
iShares U.S. Telecommunications ETF (IYZ)
Expense Ratio: 0.43%
Like some of the other telecom ETFs highlighted here, the iShares U.S. Telecommunications ETF (BATS:IYZ) was once more traditional in its approach, but was reconfigured to reflect the new communication services sector.
IYZ tracks the Dow Jones U.S. Select Telecommunications Index and holds 44 stocks. This telecom ETF differs from rivals such as VOX and FCOM because Verizon and AT&T still combine for over 32% of its weight. That said, a significant portion of IYZ’s holdings are classified as technology stocks, including Cisco Systems (NASDAQ:CSCO). Cisco is this telecom ETF’s third-largest holding at a weight of more than 15%.
IYZ has a three-year standard deviation of 13.1% and a trailing-12-month dividend yield of 2.7%.
iShares Global Comm Services ETF (IXP)
Expense Ratio: 0.47%
The iShares Global Comm Services ETF (NYSEARCA:IXP) can be seen as the global counterpart to the domestic IYZ.
IXP is just over 17 years old, follows the S&P Global 1200 Communication Services Sector Index and holds 66 stocks. This telecom ETF is more reflective of the communication services sector, as implied by its name. Facebook and the two Alphabet stocks combine for approximately 30% of IXP’s roster.
Nine countries are represented in this telecom ETF, but IXP devotes two-thirds of its weight to U.S. stocks. The global exposure does boost IXP’s income profile as highlighted by a trailing 12-month dividend yield of 4.3%.
Pacer Benchmark Data & Infrastructure Real Estate ETF (SRVR)
Expense Ratio: 0.6%
The Pacer Benchmark Data & Infrastructure Real Estate ETF (NYSEARCA:SRVR) is not one of the traditional telecom ETFs, but it is a credible play on a major industry theme: the rollout of 5G. As just one example, AT&T is rolling out 5G in 12 U.S. cities this week.
SRVR, which debuted in May, screens real estate investment trusts (REITs) by property type, revenue type and tenant type. This telecom ETF’s components consist mainly of REITs that generate the bulk of their revenue from data and infrastructure properties. Infrastructure and data REITs combine for over 61% of SRVR’s weight.
At the end of the third quarter, SRVR traded at 21.62x funds from operations (FFO), the common REIT valuation metric, with a dividend yield of 3.4%, according to issuer data.
Todd Shriber does not own any of the aforementioned securities.
