Telecom Sector Rides the Internet Wave

If, like me, you’re old enough to remember a time without the Web and e-mail, the fact that you’re able to read an online publication like Money and Markets is impressive. Even more so if you are reading it on your smartphone.

Sometimes I still can’t believe it … I’m in Texas, Weiss Research is in Florida, and our readers are all around the world.

Today we’ll take a look at the sector that makes much of the Internet possible: Telecommunications. With ETFs, you can be part of the miracle and maybe turn a profit at the same time!

Beginnings: The Humble Telephone

The year was 1876. Alexander Graham Bell spoke into his new invention: “Mr. Watson, come here, I need you.” Bell’s assistant in the other room heard it clearly — and the world would never be the same.

Now, just 135 years later, we not only talk to each other from long distances, we look at each other, too. We view videos, we listen to sounds, we read words, and we look at pictures — if the right technology is in the right place at the right time.

Telecom companies make it all happen. They manufacture the equipment, string the wires, launch the satellites, and keep it all connected. It’s a tribute to their success that we don’t even think about, except on those rare occasions when it stops working.

The world is still changing today as telecom shifts from voice to data, and from fixed land lines to mobile wireless connections. We’re living through developments every bit as revolutionary as the first Bell telephone.

Can you make money in the telecom boom? You bet! You may not be in a position to start a new company or invent a new mobile device, but you can definitely get in on the action. ETFs are a quick and simple way.

Not just any ETF will do, of course. I have some favorites and some you should probably avoid. We’ll start with the ETFs I like:

• iShares DJ U.S. Telecommunications (IYZ) is the largest telecom ETF and probably the most well-known.
• Vanguard Telecommunications Services (VOX) is my current favorite for this sector. VOX has broad coverage and is also the lowest-cost telecom ETF.
• SPDR S&P Telecom (XTL) is fairly new, launched only in January 2011. XTL is the only ETF from this sector that doesn’t use a traditional capitalization-weighted strategy. Instead, it is equal-weighted, giving more exposure to some of the smaller telecom stocks.
• iShares S&P Global Telecommunications (IXP) is a good solution if you want telecom exposure covering the entire globe, including the U.S.

So there you have four candidates. Now I’ll list four more that, in my opinion, are probably not such great ideas:

• Telecom HOLDRS (TTH) and Wireless HOLDRS (WMH) both have light trading volume, and they suffer from the many disadvantages of the HOLDRS structure. Avoid these unless you want a lot of aggravation.
• SPDR S&P International Telecom (IST) has struggled to gain investor acceptance. I suspect this is because the best growth is in U.S. telecom stocks, which IST excludes. As I said above, IXP is a better solution because it gives you both domestic and foreign telecom exposure.
• Focus Morningstar Communications Services Index ETF (FCQ) is new and, as far as I can tell, offers no unique advantages. My guess is that FCQ won’t be around very long.

Is telecom the most exciting sector you can play with ETFs? No, probably not. In my view though, right now it may offer a good opportunity to profit.

Do a little exploration and I bet you’ll agree. As always, the timing will be critical.

Best wishes,

Ron