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The Top Tech ETF of the Week

By Jamal Carnette, CFA – Jan 24, 2016 at 9:30AM

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For the trading week ended Jan. 22, which tech-related exchange-traded fund fared the best?

SOURCE: FLICKR USER GOTCREDIT.

The proliferation of ETFs has arguably been the best trend for ordinary retail investors during the past decade. Because they're composed of many different stock holdings, ETFs offer investors instant diversification, much like mutual funds. However, ETFs generally offer this diversification with lower fees, more price transparency, and better tax efficiency.

However, you should still learn about an ETF and the niche it represents before you buy a share of it. This consideration is especially important in the fast-moving technology field.

With that in mind, let's look at the top non-levered, non-inverse tech-sector ETF this week. With more than $200 million in assets under management and sufficient trading volume, this ETF outperformed the Nasdaq Composite's 2.3% gain for the holiday-shortened trading week ended Jan. 22.

The first gain of the year
After enduring the worst yearly start in the history of the market, the third trading week of 2016 had a decidedly better ending. Friday was decidedly solid for the markets overall, as comments from European Central Bank President Mario Draghi and Saudi Arabia boosted both the stock and oil markets.

However, the Vanguard Telecommunication Services ETF (VOX -3.05%) had an even better week by reporting a gain of 3.2%. The investment tracks the MSCI's U.S. Telecommunications Index, a market-capitalization weighted index in which major telecommunications companies AT&T (T -1.50%) and Verizon (VZ -1.04%) comprise nearly half the weighting. As a result of these two holdings, the ETF sports a low price-to-earnings ratio of 15 and a dividend yield of 3.5%.

Vanguard's Telecommunations ETF has an extremely low 0.10% expense ratio. This rate is keeping in the tradition of Vanguard's legendary founder, Jack Bogle, who essentially created the index fund and is the leading proponent for investors to buy low-cost index-tracking funds rather than expensive, actively managed funds.

What worked for the Vanguard Telecommunication Services ETF?
The impetus for the ETF's overperformance was Verizon's strong fourth quarter. On Thursday, the company reported a beat on both EPS and revenue figures but really impressed investors when it reported 1.5 million net postpaid connection adds in the quarter. In the face of aggressive competition from scrappy T-Mobile, which is also in the index, Verizon was able to lower its fourth-quarter churn rate 18 basis points on a year-on-year basis, from 1.14% to 0.96%.

Following the positive report, shares continued their gains with a Wall Street Journal report that the company is working with media juggernaut Hearst Corporation for a new millennial-focused online-video venture. Verizon shares finished the week up 4.8%. AT&T finished the week strong as well, trading in sympathy with Verizon as investors became decidedly more optimistic in regard to AT&T's fourth-quarter earnings report on Tuesday, in the wake of Verizon's results.

More recently, these big telecommunication companies are seeking to grow adjacent businesses to keep their top lines growing. In addition to their video-delivery properties -- AT&T's purchase of DirecTV, and the Verizon FiOS brand -- AT&T is focused on expanding into new geographies in Latin America, while Verizon is expanding its content holdings by buying AOL and the aforementioned joint project with Hearst.

If you're in the market for an ETF containing both companies, perform the necessary due diligence on Vanguard's Telecommunication Services ETF to see if it fits your profile.

Jamal Carnette owns shares of AT&T. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Vanguard World Fund - Vanguard Communication Services ETF Stock Quote
Vanguard World Fund - Vanguard Communication Services ETF
VOX
$82.93 (-3.05%) $-2.61
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$38.98 (-1.04%) $0.41
AT&T Inc. Stock Quote
AT&T Inc.
T
$15.59 (-1.50%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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