Telecom: Shelter From The Storm

Published on Friday, 11 May 2012 23:26 Written by Todd Shriber

Most investors know that the S&P 500 tracks 10 sectors and most of those investors can rattle off at least a few of these industry. It’s safe to say even novice investors would accurately list financials, energy and technology names. More seasoned investors would be apt to get those groups along with staples, health care, industrials and maybe utilities.

However, the one sector a lot of investors overlook is also the one with the smallest weighting in the S&P 500: Telecom. Despite the fact that AT&T (NSYE: T) and Verizon (NYSE: VZ) are two of the largest companies in the U.S. from any sector and are members of the Dow Jones Industrial Average, the telecom sector accounts for just 3% of the total weight of the S&P 500.

At the moment, its low weight in broader market index isn’t what’s important to remember about the telecom sector. What’s really important right now is to remember that boring is beautiful in volatile market environments. Telecoms are defensive names prized for dependable, robust dividends.

As global markets have slid in recent weeks amid weak U.S. and Chinese economic data and escalating concerns about the viability of the Euro Zone, investors have significantly reduced their appetites for risk. Those that don’t move all into cash or bonds, head to same sectors over and over again: Consumer staples, health care and utilities. Let’s not forget, which is equally as low-beta and defensive as those other groups, perhaps even more so.

The proof is in the pudding. On a week when S&P 500 and the Dow both lost more than 1%, AT&T and Verizon were both up more than 3%, making them two of best performing stocks in the Dow. It’s just one day, but consider this anecdote: On Tuesday, all but two of the Dow’s 30 stocks closed lower. AT&T was one of the two that closed higher.

Investors can opt for ETFs to gain telecom exposure and the iShares Dow Jones US Telecom Index Fund (NYSE: IYZ) and the thinly traded SPDR S&P Telecom (NYSE: XTL) are two to consider. However, for as great as ETFs are, telecom is the perfect example of a sector where single stocks are the preferred option over ETFs.

While IYZ did outperform the S&P 500 this week, it still fell and XTL actually lagged the broader market by a health margin. Plust, telecom ETFs don’t yield anywhere near what their individual holdings do. If you’re going to dial up telecom, do it with AT&T and Verizon on the basis of the pair being low-beta and their dividends being the safest in the industry.  Friday, Credit Suisse upgraded these two names to an Outperform rating.