IYT iShares US Transportation ETF

Markets have been on pretty much a straight up trajectory since the Fiscal Cliff was resolved in late December. Once that issue was eliminated, the S&P 500 stormed higher, adding about 6% in January, marking a great start to 2013.

However, the rally has started to sputter in recent sessions, as many now are looking to woes in Europe and the looming sequester as the next big issue for stocks. If either of these problems start to drag on the market, a focus on lower beta stocks could be ideal.

While there are a number of sectors that can accomplish this task, one overlooked one is arguably the telecom industry. This corner of the market has also jumped higher as of late, but thanks to its low volatility, it hasn’t seen the same surge that many of its riskier counterparts have (see the Comprehensive Guide to Telecom ETFs).

This could make this sector an ideal one for investors who believe that the market might still have some room to run higher, but are also starting to worry about a pullback in the near term. If this should pass, telecoms look to be well-insulated from the concerns and could outperform.

It also doesn’t hurt that these securities often have great dividend yields, making them excellent choices for income seeking investors. A basket approach could be a good way to obtain this exposure with an even lower risk, so an ETF approach could be taken (Read 3 Sector ETFs with Solid Yields).

Although there are a handful of telecom ETFs out there, each with their own pros and cons, one way to narrow down the field could be by using the Zacks ETF Rank.  

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio within the telecom space, we have taken a closer look below at a Top Ranked ETF in the sector, the Vanguard Telecom Services ETF (VOX):  

VOX in Focus

This ETF focuses in on the integrated telecom services market as this industry accounts for roughly two-thirds of the total assets. Beyond that, the rest is allocated to wireless (26%) and alternative carriers (11.7%), suggesting that the product is pretty concentrated into a few key segments (read 5 Sector ETFs Surging to Start 2013).

In terms of individual holdings, mainstays Verizon (VZ) and AT&T (T) dominate the portfolio although there are another 32 securities in the product. Still, the top ten accounts for roughly 70% of the total, suggesting a huge concentration in the big cap companies.

Although the concentration is somewhat disappointing, investors should note that this is a very low cost product, charging just 14 basis points a year in fees. Volume is a little light at just under 70,000 shares a day, so bid ask spreads could increase the total cost just a bit.

This looks to be easily made up by a robust yield though, as the product is currently showing a 3.3% payout in SEC yield terms.  Thanks to some of these factors, we have assigned this fund a Zacks ETF Rank of 1 or ‘Strong Buy’.

That means that we are looking for VOX to be a strong performer in 2013 with a medium risk level. Thus, we are expecting it to outperform similar funds over the next one year period (read Two Sector ETFs to Buy in 2013).

It should also be noted that this rating contrasts sharply with the rest of the telecom ETF sector. Other popular funds like IYT or even the low asset FONE receive poor rankings, suggesting that VOX could be one of the top tickets this year in the telecom ETF world.  

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FT-CEA SMRTPHN (FONE): ETF Research Reports
 
ISHARS-DJ US TR (IYT): ETF Research Reports
 
AT&T INC (T): Free Stock Analysis Report
 
VIPERS-TELE SVC (VOX): ETF Research Reports
 
VERIZON COMM (VZ): Free Stock Analysis Report
 
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