Dial Up This Telecom ETF

Markets Benzinga

In the hunt for safe-haven sectors, it is somewhat easy to overlook the telecommunications sector. After all, at 2.77 percent, it is the smallest sector weight in the S&P 500. However, that does not mean there is not opportunity with exchange-traded funds such as the Fidelity MSCI Telecommunication Services Index ETF (FCOM).

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Year-to-date, FCOM is up about 6.4 percent, offering modest outperformance of the Fidelity MSCI Utilities Index ETF (FUTY). FCOM yields 2.88 percent on a trailing 12-month, which is 114 basis points above Monday's closing yield on 10-year U.S. Treasurys.

Related Link: Deutsche Bank Likes These 5 Telecoms With 20% Upside Better Than The Rest

Risks For FCOM

One risk with FCOM is that the ETF is top heavy. Dow component Verizon Communications Inc. (VZ) and former Dow member AT&T Inc. (T), the two largest U.S. telecom companies, combine for 48.4 percent of FCOM's weight.

To put that into context, the 24.4 percent FCOM allocates to shares of Verizon is more than 12 times the weight assigned to Cogent Communications Holdings Inc (CCOI), the ETF's tenth-largest holding.

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Upside Ahead, However

The good news is some analysts see significant upside ahead for some FCOM holdings, including AT&T and Frontier Communications Corp (FTR).

Though defensive in nature and supported by healthy (mid-/high-single-digit) dividend yields, we believe the sector faces a challenging growth trajectory near term given competition from both internal (Wireless) and external (Cable) industry sources, said Deutsche Bank analyst Matthew Niknam in a note out last week.

The analyst believes that in the absence of substantial revenue growth opportunities, companies benefiting from scale-related cost efficiencies and improving profitability are the preferred investment options. He expects AT&T and Frontier Communications to be the key beneficiaries of this theme, Benzinga reported.

Analyst's Take On The Sector

Niknam initiated coverage of five telecom names, including several FCOM holdings, with buy ratings.

Investors appear to be catching on to telecom ETFs as safe-haven, yield alternatives or complements to utilities fund. While FCOM may look small with just $88 million in assets under management, it cannot be ignored that $53.5 million of that total has come into the ETF just this year.

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