A Telecom ETF For Thrifty Investors

Here is an anecdote that highlights just how much low beta, stodgy stocks have been in style this year: On a year-to-date basis, just two members of the Dow Jones Industrial Average are up at least 10 percent. One is Wal-Mart Stores, Inc. (NYSE:WMT), the world's largest retailer.

That serves as a reminder as to why consumer staples exchange-traded funds have been popular with investors this year and, more importantly, why several such ETFs made all-time highs last Friday.

The Dow's other standout this year has been Verizon Communications Inc. (NYSE:VZ), which is up 15 percent. No need for a double take. A stodgy large-cap telecom stock has surged 15 percent in less than three months.

On the back of Verizon and rival AT&T Inc. (NYSE:T), telecom ETFs are participating in the low volatility sector ETF brigade's march higher. For example, the Vanguard Telecommunication Services ETF (NYSE:VOX) is up 8.2 percent year-to-date, or better than twice the performance of Vanguard's equivalent consumer staples ETF.

Looking Closer At VOX

Like their consumer staples and utilities counterparts, telecom ETFs lure investors with tempting dividend yields.

Large telecom firms have tended to offer above-average dividend yields and may be attractive to income-oriented investors. This fund's dividend yield (3.5 percent as of Jan. 31, 2016) and annual payout have displayed some volatility during the past decade, said Morningstar of VOX.

VOX has the added benefit of being the least expensive telecom ETF on the market with an annual fee of just 0.1 percent, or $10 per $10,000 invested. That makes VOX less expensive than 93 percent of rival funds, according to Vanguard.

Knowing what one is buying is prosaic advice, but in when it comes to VOX, investors should know they are making a commitment to Verizon and AT&T with this ETF as those stocks combine for nearly half the ETF's weight. No other stock accounts for more than 4.4 percent of the VOX lineup. While VOX is dominated by Verizon and AT&T, the ETF also allocates over a quarter of its weight to small-cap stocks.

The U.S. telecom sector continues to evolve. Households continue to exchange land lines for cellphones, while cable players keep invading telecom firms' turf, offering Internet access and even phone service. More cable consolidation is occurring, added Morningstar.

And big cable companies (which are not held in this ETF) are boosting network quality and trying to take market share from telecom rivals in the less attractive residential fixed-line portion of the market. Wireless customers increasingly use their phones for data instead of voice, although voice is where telecom firms up to now have reaped the most revenue. Telecom now is a hypercompetitive environment, as large players AT&T and Verizon offer tiered data pricing while other providers offer straight unlimited data plans. At least for now, business fixed-line telecom service remains a stable revenue source for telecom firms.

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