VOX Vanguard Communication Services ETF

Yesterday, AT&T (T) released it fourth quarter 2013 numbers with earnings beating the Zacks Consensus Estimate comfortably, while revenues barely managed to scrape by analyst predictions. In fact, lower-than-expected performance in some key metrics and a pessimistic outlook for 2014 failed to stir optimism among investors (read: A Comprehensive Guide to Telecom ETFs).

4Q Earnings in Focus
 
The company reported adjusted earnings of 53 cents per share, up 20.5% from the year-ago quarter and 3 cents ahead of the Zacks Consensus Estimate. A record low churn rate, a 4.8% quarter-on-quarter increase in wireless subscriptions and a 7.0% decline in the share count were possibly the reasons behind the beat. 
 
Revenues inched up 1.8% year over year to $33.2 billion, and managed to exceed the Zacks Consensus Estimate of $33.06 billion. Growing demand for wireless data service along with strong U-verse and strategic business helped AT&T to log year-over-year revenue growth in the quarter.
 
However, investors might have demanded more from the No. 2 U.S. mobile services provider as AT&T slipped into red in after hours trading, while it also struggled in the Wednesday session too. Actually, the telecom giant fell shy of Street estimates on indicators like wireless subscriber growth. Total wireless subscribers growth came in at 809,000 in the fourth quarter which was short of analyst expectations of 1.25 million.
 
If this was not enough, the muted guidance completely undermined investors’ confidence. While the revenue guidance for 2014 was slightly higher than the consensus view, the earnings guidance was short of estimates.
 
Market Impact
 
Thanks to the not-so-inspiring overall AT&T earnings picture its shares fell 2.05% in after hours trading on slightly elevated volume. However, this dip might open up a buying opportunity as the long-term outlook for AT&T seems bright. Its bullish Zacks Industry Rank in the top 40% also affirms this fact.
 
AT&T has sizable exposure (at least 14%) in telecom and technology funds like Vanguard Telecommunication Services ETF (VOX), Fidelity MSCI Telecommunication Services Index ETF (FCOM) and iShares Global Telecom ETF (IXP). This suggests that the performance of the fund is highly dependent on AT&T (see: all the Telecom ETFs here). Below, we have highlighted some of these funds in detail.
 
Vanguard Telecommunication Services ETF (VOX)
 
VOX, a reasonably popular telecom ETF, tracks the MSCI U.S. Investable Market Telecommunication Services 25/50 Index and holds 32 stocks in its basket. The stock-under-review, AT&T, occupies the top position in the basket with 21.7% of assets. VOX has company-specific concentration risk putting as much as 70% of investments in its top 10 holdings.
 
About three-fifths of the portfolio is skewed toward integrated telecom services, followed by wireless and alternative carriers. The product has amassed $571.3 million in its asset base and charges 14 bps in annual fees.
 
VOX lost nearly 2.45% in the last one-month period and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook (read: Verizon Earnings Puts These Telecom ETFs in Focus).
 
Fidelity MSCI Telecommunication Services Index ETF (FCOM)
 
This fund follows the MSCI USA IMI Telecommunication Services 25/50 Index, holding 33 stocks in its basket. AT&T takes the top spot at 21.17%. From a sector perspective, diversified telecom services make up for 74% of assets.
 
The ETF is unpopular with just $25.5 million in AUM while its expense ratio came in at 0.12%. The fund is down over 2.30% in the past one month.
 
iShares Global Telecom ETF (IXP)
 
This is one of the most popular ETFs in the communication equities ETF space with about $591.4 million in assets. The product tracks the S&P Global Telecommunications Sector Index and charges 48 bps in fees and expenses.
 
In focus AT&T takes the second spot in its 34-security basket with a 14.01% share. In terms of industrial exposure, diversified telecom accounts for 65.40% of the total while wireless telecom takes the rest. IXP is down 3.65% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook.
 
Bottom Line
 
Telecom equities are surely an interesting investment avenue thanks to the relentless progress in wireless broadband technology and a huge untapped potential in the emerging markets.
 
There is only one glitch for the sector – the heightened competition from increasing mergers & acquisition activities in the space. It has resulted in promotional offers by various players to lure customers away from their peers.
 
Having said this, we are overall bullish on the sector and believe the sector giants like AT&T and Verizon will see big gains over time and so will the funds that focus in on this space (read: 3 Telecom ETFs to Watch on Huge Verizon Deal).
 
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FID-TELECOM (FCOM): ETF Research Reports
 
ISHARS-GLB TELE (IXP): ETF Research Reports
 
AT&T INC (T): Free Stock Analysis Report
 
VIPERS-TELE SVC (VOX): ETF Research Reports
 
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