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 5.6% loss for the holiday-shortened trading week ended Feb. 5.
Earnings weighed on gains
This year continues to be brutal for equity holders, especially in the technology industry. Earlier hypothetical concerns about a potential slowdown appear to now be reflected in financial results, with high-interest Apple, LinkedIn, and GoPro disappointing investors. As a result, investors continue to flee to low-beta safer equity investments with reliable business models, cash flows, and dividend payouts. A natural fit for nervous investors is Vanguard's Telecommunication Services ETF (NYSEMKT:VOX), and the ETF overperformed this week by posting a 0.5% loss.
There's a lot to like about this ETF. First, it comes with a expense ratio of 0.10%, which is very low when compared with other ETFs. Additionally, the ETF pays a dividend yield of 3.4% as a result of its large holdings in well-known dividend payers AT&T (NYSE:T) and Verizon (NYSE:VZ). A potential downside of this investment is it passively tracks the MSCI US Investable Market Telecommunication Services 25/50 Index, a market-capitalization-weighted index. As a result, large telecoms AT&T and Verizon comprise nearly 50% of the investment. If you're looking for a diversified ETF, this may not be the best option to gain exposure to the telecommunication industry.
Verizon and AT&T helped this week
AT&T fought the greater-market's malaise and finished up 2% on the week. Yesterday AT&T received an upgrade from DA Davidson with a one-year price target 10% higher than current levels. Add to that the company's 5.25% yield, and Davidson's price target assumes the company will provide investors with a 15% return. When compared to the Nasdaq that lost 5.6% this week alone, AT&T's 15% return looks quite solid.
The company's recently reported results met analyst expectations on an adjusted-earnings basis and narrowly missed revenue as a result of accounting changes. Looking forward, the company is positive about the Internet of Things as a potential undervalued growth opportunity. CEO Randall Stephenson has been particularly bullish of the connected-car's potential for gains, playing up the recently completed deal with Ford Motor Company. With a forward-price-to-earnings ratio of 12, AT&T could surprise investors if this deal is not being properly incorporated into analyst expectations.
Verizon also added nearly 2% on the week, as the company continues to perform well after its fourth-quarter earnings report. Investors were specifically ebullient about performance from Verizon Wireless when the company reported it added 1.5 million postpaid net additions with a decrease in churn rates.
Much like AT&T, Verizon is bullish on the Internet of Things, even reporting the IoT provided nearly $700 million of revenues in full-year 2015. In a market characterized by fear and underperformance, these telecoms are providing investors with dependable core operations and growth in a fast-growing new market. If you're looking to add telecoms to your portfolio, check out Vanguard's Telecommunication Services ETF to see if it fits your investing profile.