Telecommunications ETF Investing 101

The U.S. telecommunications industry is presently riding the growth trajectory and the momentum is likely to continue in 2015 as well. Telecommunications is one of the few industries to have seen rapid technological improvement even during recession. Owing to the significance of telecommunications as an infrastructure product, we expect the overall economic dynamics to shift in the industry’s favor.

Unprecedented growth in high-speed mobile Internet traffic, in particular of wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space. Any new network standard aims at providing faster data connectivity, quick video streaming with high resolution and rich multimedia applications. The rising demand for technically superior wireless products has been the silver lining for the telecom industry in an otherwise tough environment.

The ongoing Advanced Wireless Servies-3 (AWS-3) spectrum auction being conducted by the Federal Communications Commission (FCC) has accumulated a record-breaking $44.89 billion. Unexpectedly high bidding for AWS-3 Spectrum clearly indicates that telecom operators expect the demand for mobile data and video services to rise in the future.
 
The FCC also plans to conduct a broadcast incentive (spectrum at the hands of TV broadcasters) auction in 2016 to ease the pressure on wireless operators. The spectrum license winners from different regions will upgrade their respective networks to gain a competitive edge.
 
Key Attributes for 2015
 
(1) The telecommunications industry is known for its huge barriers to entry. Deployment of high-speed network infrastructure requires significant capital expenditure, which very few entities can afford.
 
(2) The sector is immune to the sovereign debt crisis in Europe. A potential slowdown in China or any non-U.S. economic fluctuation will not have any immediately impact on this industry.
 
(3) U.S. telecom carriers have the option to expand globally through acquisitions or partnerships as several emerging nations are installing 3G and 4G networks rapidly.
 
(4) We expect telecom carriers to continue paying handsome dividends in 2015 as well. In 2014, eight major telecom and cable TV operators have paid an average dividend yield of 4.7%. Apart from traditional telecom services, carriers can also offer value-added services, such as securitized data management, cloud computing, mobile banking to name a few. These new offerings will generate considerable growth for the companies.
 
(5) We may see more product sharing deals between telecom, cable TV, and satellite TV operators as each of these players are trying to gain a foothold in the other’s territory. Even, pay-TV services, offerings to business enterprises, mobile backhaul and metro-Ethernet segments may witness more convergence. 
 

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