Following a precipitous decline at the hands of the fiscal cliff negotiations, telecommunications ETFs have bounced back. The sector might have more upside in store this year due to increased LTE network spending. That catalyst be spark increased wireless data growth.
"We believe the tower providers, with their stable earnings model, will benefit from increased LTE investment and fare best in the near term," according to a research note by S&P Capital IQ. The research firm also highlighted increasing differences among the four major national wireless providers.
"We believe carriers will actually increase prices for data to offset declining voice prices in the U.S. wireless market," said S&P Capital IQ. "Also, there are increasing differences among the four national wireless carriers. In the fourth quarter, Verizon Wireless, part of a larger integrated telecom carrier, outperformed AT&T (NYSE: T) in terms of postpaid net additions, as both carriers saw a resurgence in smartphone sales with the launch of the iPhone 5."
The research firm has three-star ratings on Dow components AT&T and Verizon (NYSE: VZ), the parent company of Verizon Wireless.
As the two largest U.S. telecommunications firms by market value, AT&T and Verizon usually hold dominant positions within ETFs tracking this sector. That is the case with the iShares Dow Jones U.S. Telecommunications Sector Index Fund (NYSE: IYZ) and the Vanguard Telecommunication Services ETF (NYSE: VOX), both of which are rated Marketweight by S&P Capital IQ.
Verizon and AT&T combine for 43.6 percent of VOX's weight and over 20 percent of IYZ's weight. IYZ "has roughly 18% of its holdings in Wireless Telecommunication stocks. In particular, the fund has significant exposure to wireless tower providers Crown Castle Corp (NYSE: CCI) and SBA Communications (NASDAQ: SBAC), as well as service provider Sprint Nextel (NYSE: S); all three are top ten holdings," according to the research firm.
S&P Capital IQ has a five-star rating on Crown Castle and four-star ratings on SBA Communications and Sprint Nextel.
Regarding VOX, S&P said the "fund has roughly 15% exposure to Wireless Telecommunication Services, and the top ten holdings include S&P Strong Buy-ranked Crown Castle and Buy-ranked SBA Communications and Sprint Nextel. The fund has a Marketweight ETF ranking based on a combination of S&P Capital IQ's Equity Research's performance, risk and cost metrics. We believe VOX has an above-average expense ratio of 0.14%, above-average S&P risk assessment and above-average standard deviation."
VOX has gained 10 percent in the past year while IYZ has returned 6.5 percent.
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