Although the mainstream press have just begun touting the benefits of 5G technology to the masses, financial writers got on the bandwagon well over a year ago. Investment publications such as Investor's Business Daily and Barron's published pieces with suggestions as to where investors could go to get ahead of the curve. The problem I discovered, is that it's a roundup of the usual subjects. AT&T (T), Verizon (VZ), T-Mobile (TMUS) and Sprint (S) for the network providers. Nokia (NOK) and Ericsson (ERIC) for the network infrastructure buildout. A laundry list of semiconductor manufacturers and software service companies includes Cisco (CSCO), Broadcom (AVGO) and Intel (INTC) to round out the docket.
Despite the fanfare, the sector hasn't done well in the last two years with the SPDR S&P Telecom ETF (XTL) and its peers relatively flat since early 2016. Don't forget that 5G is just another word for telecommunications, and telecom stocks are usually purchased for their dividends, not price appreciation. These widow and orphan stocks may produce income, but not necessarily generate alpha. There are small caps that reside in the telecom sector if you're looking for potential ten baggers, but investing in individual securities is dangerous these days. Most of the time you think you're buying an expensive Cabernet Sauvignon, but end up with a bottle of Two Buck Chuck.
Exhibit A is Ceragon Networks (CRNT). The wireless backhaul specialist has languished the past five years diving from $5 to $2.50. Investor's Business Daily won't cover stocks unless they are above $10, so you can tell it's radioactive. Nevertheless, traders are recommending the company in the hopes it's a home run. Can it happen? Absolutely, but the chances are slim. Right now you are sitting on dead money and it's very difficult to buy at the bottom and sell at the top. Ceragon Networks is a pipe dream if you are looking to increase assets.
Another pure play is Zayo Group Holdings (ZAYO), which provides bandwidth infrastructure solutions to communications companies in North America and Europe. It's had a nice run the past two years going from $25 to $37, a 48% gain which outpaced the S&P 500. A diamond in the rough. However, with the recent purchase of Electric Lightwave and an upcoming deal for Spread Networks, it may trade sideways to digest the acquisitions. Investing in individual equities after significant runs can burn you, especially for a company projected to grow only 10% per year.
Right now, the rising stars of 5G may very well be the startups looking to dethrone telecommunications royalty. According to ABI Research, Athonet, CellWize, CellMining, AirHop Communications, Core Network Dynamics, Blue Danube, and Vasona Networks are some of the privately held firms being trumpeted. The operative expression here is 'privately held', which means Venture Capitalists, Investment Banks and Hedge Funds are the entities able to invest in these pioneering organizations. Retail investors are left out of the process. Nevertheless, even for the experienced and deep pocketed money managers, it's still a crap shoot, but they're usually playing with other people's money.
My belief is that the best way to play 5G is through Telecom ETFs because in 3 years from now, 5G will be synonymous with the traditional telecom companies. Although the deployment of 5G networks will slowly roll out in the next 24 months, investors usually bid up equities in advance of the implementation of a technology. The timing may be right for you to add one of these subsector ETFs to your portfolio, not only because they will benefit from 5G, but because they've been market laggards of late. You also receive dividends while waiting for the ascension.
TELECOMMUNICATION ETFs
An important factor to consider before buying a Telecom ETF is that S&P Dow Jones Indicies and MSCI recently announced upcoming changes to the Global Industry Classification Standard. The Global Industry Classification Standard decides what companies go into what indexes. On September 29th of this year, the Telecommunications Services Sector will be expanded and renamed Communication Services. Companies providing Internet access such as Comcast (CMCSA) are to be included. Telecommunications ETFs that mirror an index will be effected by the broadening of the industry group, probably for the better because you're injecting growth into the equation.
- SPDR S&P Telecom ETF (XTL): Introduced in 2011, this equally weighted fund has a fairly high expense ratio of 0.35%. With 48 holdings, it tracks the S&P Select Telecom Index. Industry mainstays such as AT&T and Verizon aren't included in the top 10 holdings which raises a red flag for me because you're looking for dividends in these investments. If you are an investor, you can find a lower expanse ratio. If you are a trader, you can find better volume. Dividend yield is 2%.
- iShares Telecommunications ETF (IYZ): Although IYZ has the highest expense ratio in the group at 0.44%, it's also the most liquid and favored by traders. Founded in 2000, right after the dot com crash, it's the granddaddy of telecom ETFs. I liked the top four holdings of AT&T, Verizon, T-Mobile and Sprint. That's the way it should be in its niche. It tracks the Dow Jones U.S. Select Telecommunications Index. The investment has a hefty dividend yield of 3.38%.
- Vanguard Telecommunication Services ETF (VOX): VOX is a market-cap weighted fund tracking the MSCI U.S. Investable Market Telecommunication Services 25/50 Index. Vanguard is synonymous with minimal expense ratios, and at 0.10%, you only pay $10 for every $10,000 invested. Verizon and AT&T comprise almost half the portfolio. Zayo Group is also included in the top ten holdings. A not so great investment for income seeking buy and hold investors with the dividend yield being a paltry 0.99%
- Fidelity MSCI Telecommunication Services Index ETF (FCOM): FCOM is relatively new to the fold being a shade under five years old, but competes toe to toe with the Vanguard offering. In fact, it has a lower expense ratio than VOX at 0.08%. The stats are almost identical to VOX in that it mirrors the same index and has approximately indistinguishable holdings. The big difference between the two funds is the volume with VOX almost doubling FCOM. Nevertheless, if you are a buy and hold investor, and are watching your expenses, this is another great option for you. The dividend yield is 3.22% which far outpaces VOX.
- ProShares Ultra Telecommunications ETF (LTL): The Wicked Witch of the West from The Wizard of Oz once said: "Do you wanna play with fire, scarecrow?". That's exactly what you're getting with LTL, a financially engineered instrument that delivers two times the profits and losses of securities in the telecom sector. It's been around for ten years, so it's probably not going anywhere. The expense ratio is steep at 0.95% and recommended for professional traders only. If you decide to venture into this option, you shouldn't hold your shares any longer than the trading day.
CONCLUSION
Although laggards to the S&P 500 where price appreciation is concerned, Telecom ETFs should be judged by their dividend yields. This is why I recommend FCOM. Not only does it boast the lowest expense ratio, but it also pays out close to twice the income of the S&P 500 on a percentage basis. In addition, when index alterations are introduced in September, it may get a boost from growth stocks included in FCOM's portfolio. Finally, if infrastructure legislation is passed by the United States Government, you may also see inflated results because 5G buildout should be included in the spending package.