Telecom ETFs May Offer Haven From Europe

In a world of massive uncertainty and miniscule yields, S&P Capital IQ recently recommended that investors look to international telecom sector for both safety and high-yield dividends.

With the 10-year Treasury bond yield hovering around 2%, S&P Capital IQ analyst Todd Rosenbluth recommended two telecom ETFs that pay yields nearly three times higher. The iShares MSCI ACWI ex US Telecommunication Services Sector Index Fund (AXTE) currently pays a dividend that yields 5.7% and the and the SPDR S&P International Telecommunications Sector ETF (IST). Both invest exclusively in telecom companies domiciled outside of the U.S.

Rosenbluth says telecom stocks, both domestic and international offer stable dividends in light of macroeconomic uncertainties. Even though some of the large telecom stocks appear to be undervalued, he recommends ETFs because they provide a low-cost way to diversify and reduce risk. S&P favors defensive sectors and is “cautious on the potential gains in the broader market, believing that the risk of global recession is rising, influenced by mixed ‘hard’ economic data and ‘soft’ data that remain at recessionary levels, as well as ineffectual government policy.”

“We believe that certain telecom companies, while exposed to potential macroeconomic weakness, offer favorable total return potential as their relatively stable customer bases provide strong cash flow to support the dividend and reinvest in the business for growth,” says Rosenbluth.

Launched in July 2010, the iShares MSCI ACWI ex-US Telecommunication Services Sector Index Fund holds just $3 million in assets. The top ten stocks make up 57% of the portfolio, with Vodaphone at 15% and Telefonica at 9%. Rosenbluth particularly likes the fact that 21% of the portfolio is in emerging markets. The expense ratio is a reasonable 0.48%

The three-eyar-old SPDR S&P International Telecommunications Sector ETF holds just a little more than $10 million in assets. It’s more concentrated than AXTE with the top ten stocks making up 66% of its portfolio. Vodaphone makes up 20% of the fund, while Telefonica is at 12%. A key difference is this ETF doesn’t have exposure to emerging market telecoms from China or Latin America. The expense ratio is 0.5%.

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