Telecommunications is a necessary utility. The need for telecommunications in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance. The U.S. telecom industry has developed into an intensely contested space where success largely depends on technical superiority, quality of services, and scalability. Thus in order to stay abreast, existing players need to introduce innovative products, or merge with other companies despite a strict vigil by regulator the Federal Communications Commission (FCC). 

Momentum to Continue
 
The rising demand for technologically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Uninterrupted advancement in telecom technologies has helped telecom operators to adopt newer business models in order to boost revenues. These include new pricing plans, a shift from unlimited data usage to tier-based data usage plan, and higher upgrade fees for smartphones and tablets. (Read: 3 ETF Winners and a Loser Post Meeting)
 
New Growth Areas

We expect wireless networks to provide the primary impetus to the telecom industry. In this regard the latest innovation of the Internet of Things (IoT) may become the most important component for the telecom industry’s future growth. The IoT is the network of physical objects embedded with electronics, software, sensors and connectivity to enable it to achieve greater value and service by exchanging data with other connected devices.

In the meantime, growth of software-defined networking (SDN), and network function virtualization (NFV) have encouraged telecom operators to invest heavily in the communications infrastructure market. SDN provides customers increased bandwidth utilization, higher reliability, and reduced capital spending. Meanwhile, NFV is designed to consolidate and deliver the networking components needed to support a fully virtualized infrastructure – including virtual servers, storage, and even other networks.  It utilizes standard IT virtualization technologies. (Read: 3 Active ETFs for a Choppy Market)

Also, Internet TV is gradually gaining market traction in the U.S. Of late, the legacy pay-TV industry in the country has been facing severe competition from online video streaming service providers. The low-cost over-the-top video streaming service has resulted in massive cord cutting that is currently threatening the pay-TV business model. Internet TV has emerged as a strong alternative to counter this competitive threat.

Net Neutrality: A Concern
 
The FCC net neutrality laws announced on Feb 26, 2015, mean that high-speed broadband (Internet) is now classified as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act. Importantly, the latest regulations will be applicable to both mobile and fixed broadband networks. The reclassification of Internet makes a radical change in the way the government treats high-speed broadband service and ISP. The FCC can now strongly regulate the ISPs.

The implementation of the new law will ban common ISP practices such as data traffic blocking, slowing any data traffic and paid prioritization.  (Read: A Guide to 10 Cheapest ETFs)
 

ETFs to Tap the Sector

Against this backdrop, investors seeking to tap the growth potential of the highly competitive telecom sector may take a closer look at the ETF approach to reap maximum benefit from investing in this sector. This technique can help to spread out assets among a wide variety of companies and reduce company specific risks for a very low cost. Below, we highlight the ETFs in this sector in greater detail for Telecom ETF investors:
 
iShares Global Telecommunications ETF (IXP - ETF report)
 
IXP is one of the most popular Telecom ETFs available in the market. Launched in Nov 2001, this ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $493.11 million of assets under management and an average trading volume of roughly 52,348 shares a day in the last 3 months. The fund charges an expense ratio of 47 basis points a year.
 
The fund holds 30 stocks in its portfolio and has a concentrated approach in the top ten holdings with 71.73% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications Inc. (VZ), AT&T Inc. (T) and Vodafone Group Plc. (VOD) with asset allocation of 16.37%, 13.98% and 7.77%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors with asset holdings of 74.05% and 25.57%, respectively. This ETF offers a dividend yield of 11.44%.
 
Vanguard Telecommunication Services ETF (VOX - ETF report) 
 
Another popular fund in the Telecom ETF space is VOX. Launched in Sep 2004, this ETF seeks to track the performance corresponding to the benchmark MSCI US Investable Market Telecommunication Services 25/50 Index. It has assets under management of nearly $1,002.8 million and an average trading volume of roughly 66,692 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year.
 
The fund holds 29 stocks in its portfolio and has a concentrated approach in the top ten holdings with 72.50% of the asset base invested in them. Among individual holdings, top stocks in the ETF are Verizon Communications, AT&T and Level 3 Communications Inc. (LVLT) Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 62.00%, 19.00% and 18.90%, respectively. This ETF offers a dividend yield of 2.55%.
 
SPDR S&P Telecom ETF (XTL - ETF report)
 
Introduced in Jan 2011, XTL ETF tries to match the returns of the S&P Telecom Select Industry Index, before expenses. The fund manages an asset size of nearly $98.04 million and an average trading volume of roughly 28,666 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year.
 
The fund holds 59 stocks in total in its basket. However, this ETF does not follow any concentrated approach as its top ten stocks hold only 24.99% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Juniper Networks Inc. (JNPR), Telephone and Data Systems Inc. (TDS) and F5 Networks Inc. (FFIV) with asset allocation of 2.64%, 2.64% and 2.56%, respectively. Communications Equipment, Alternative Carriers, Wireless Telecommunications Services and Integrated Telecommunication Services are the four major sectors with asset holdings of 61.81%, 12.36%, 12.17% and 12.00% respectively. This ETF offers a dividend yield of 1.04%.
 
iShares US Telecommunications ETF (IYZ - ETF report)
 
Introduced in May 2000, IYZ ETF tracks investment results before fees and expenses and corresponds to the price and yield performance of the Dow Jones US Select Telecommunications Index. The fund manages assets worth nearly $683.55 million and an average trading volume of roughly 393,483 shares a day in the last 3 months. The fund charges an expense ratio of 43 basis points a year.
 
The fund holds 24 stocks and has a concentrated approach in the top ten holdings with 59.75% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications, AT&T, and Level 3 Communications with asset allocation of 9.99%, 9.68% and 6.05%, respectively. The four major sectors of this ETF include Diversified Telecom Services, Wireless Telecom Services, Communications Equipment and Real Estate Investment Trusts with asset holdings of 65.62%, 30.52%, 2.96% and 0.86% respectively. This ETF offers a dividend yield of 2.20%.
 
Fidelity MSCI Telecom Services Index ETF (FCOM - ETF report)
 
Introduced in Oct 2013, FCOM ETF tracks investment results before fees and expenses and corresponds to the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth nearly $95.3 million and an average trading volume of roughly 36,700 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year.
 
The fund holds 30 stocks and has a concentrated approach in the top ten holdings with 71.51% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon Communications AT&T and Level 3 Communications with asset allocation of 23.33%, 23.18% and 4.72%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 79.73% and 20.16%, respectively. This ETF offers a dividend yield of 2.50%.