Dialing For Dollars
Published on Thursday, 01 March 2012 20:07 Written by Todd Shriber
New York, March 1st (TradersHuddle.com) – Considering that it’s an industry that is home to a couple of the largest most recognizable companies in the U.S. and that it’s an industry whose products are used every day by almost every American the telecommunications sector is arguably an afterthought in the ETF world. Both AT&T (NYSE: T) and Verizon (NYSE: VZ) are members of the Dow Jones Industrial Average, but it often feels, as investors would prefer to own those stocks individually than via ETFs.
That doesn’t mean a fund such as the iShares Dow Jones US Telecom Index Fund (NYSE: IYZ) isn’t worth a look. Year-to-date, the iShares Dow Jones US Telecom Index Fund is only up 4.5%. That’s not even half the returns offered by the S&P 500, but it’s a lot better than what you would have gotten with AT&T or Verizon or those two telecom giants combined.
Home to just 30 stocks, it’s not surprising that AT&T and Verizon account for about 30% of IYZ’s weight. Other top-10 holdings that no pun intended, might ring a bell with investors include CenturyLink (NYSE: CTL), Crown Castle International (NYSE: CCI), Sprint Nextel (NYSE: S) and Windstream (NASDAQ: WIN).
What makes IYZ and rival funds a vexing proposition is that telecom, like consumer staples, health care and utilities, is a defensive sector. Put another way, the current market environment isn’t conducive to being excessively weighted to defensive groups. Yet, on the other hand, staples, health care and utilities ETFs were all solid performers last year. The SPDRs funds tracking those groups all offered double-digit returns, but in the past year, the IYZ is up just half a percent.
Additionally, investors are usually compensated for the lack of growth with stocks like AT&T, Centurylink and Verizon with robust yields. On average, AT&T and Verizon yield 5.5% and are currently two of the highest yielding stocks in the Dow. Centurylink yields a whopping 7.2%. IYZ currently yields about 3%. That’s better than Treasuries and money markets, but not nearly as good as the three stocks that account for over 38% of the ETF’s weight.
At the end, the IYZ isn’t a bad ETF and telecom names won’t always lag the broader market so severely. Right now, perhaps the best thing that can be said of IYZ is that it’s an ETF your grandfather would love, but not one to recommend to someone under 50 years old.
The vitals: IYZ made its debut in May 2000 and now is home to almost $573 million in assets under management. The fund currently rests about 12% below its 52-week high.