The telecommunications sector is the smallest sector weight in the S&P 500, accounting for less than 2.4 percent of the benchmark U.S. index. It's understandable, to a certain extent, that outside of the largest telecom names, the sector is sometimes glossed over by investors.
With that treatment comes a relatively small number of exchange traded funds compared to more widely followed sectors, such as technology, financial services and healthcare. That also means the competition for the honor of 2015's top telecom ETF was confined to a small amount of competitors. Though the field is small, the Fidelity MSCI Telecommunication Services Index ETF (NYSE:FCOM) is this year's best-performing telecom ETF.
Up barely more than 1 percent this year, the Fidelity MSCI Telecommunication Services Index ETF clearly is not displaying a jaw-dropping performance. However, FCOM's two main competitors, the Vanguard Telecommunication Services ETF (NYSE:VOX) and the iShares U.S. Telecommunications ETF (NYSE: IZY), have each traded lower this year.
At issue is the telecom sector's reputation as being negatively correlated to higher interest rates, a scenario that came to pass earlier this month.
Earlier this year, Bank of America Merrill Lynch examined the sectors that perform well after Fed liftoff, those that disappointed and those that were somewhere in the middle. Bank of America used the prior six tightening cycles beginning March 1983, January 1987, March 1988, February 1994, June 1999 and June 2004. The research, not surprisingly, showed that telecom and utilities stocks areusually laggards following Fed liftoff.
"Telecom was the worst or second worst performing sector in terms of average cumulative returns in 6 out of the 12 months following Fed liftoff," said BofA in a note out last week. The bank added "utilities were lackluster throughout the 12 months after Fed liftoff."
FCOM charges just 0.12 percent per year, or $12 for every $10,000 invested. Until recently, that made the Fidelity offering the least expensive telecom ETF, but VOX wrested that crown earlier this month when Vanguard said it pared fees on its sector ETFs to just 0.1 percent per year.
Dow component Verizon Communications Inc. (NYSE:VZ) and former Dow stock AT&T Inc. (NYSE:T) combine for over 46 percent of FCOM's weight. No other stock garners a weight of more than 4.75 percent in the ETF.
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