Why Aren't Investors Calling On Telecom ETFs?

The iShares DJ Telecom Fund (NYSE: IYZ) has been one of the weaker performers over the last 6 months. Indeed, it's been a bit of an underachiever throughout 2009 with a 14.3% total return. Vanguard Telecom (NYSE: VOX) has been a little stronger with a total YTD return of 18.4%.

In any other year, one might be thrilled by the double-digit percentages. Yet the vast majority of sector investments have outpaced telecom. Even the stock ETF benchmarks - S&P 500 (NYSE: SPY) , Nasdaq 100 (QQQQ), Dow (DIA) - have all experienced 21%+ through 11/16.

So it's not surprising to discover that Morningstar... in its ETF Valuating Ratings... has dubbed these telecommunication funds as "Undervalued." The explicit guidance here is that VOX and IYZ trade at significant discounts to Morningstar's estimates of fair value.

By Morningstar's assessment, the iShares DJ Telecom Fund (NYSE: IYZ) would be "Fairly Valued" at 22.43; it last traded at 18.30. IYZ would need to gain 22.6% to reach that level.

Similarly, Vanguard Telecom (NYSE: VOX) last traded at 53.06. To reach Morningstar's fair value estimation of 60.94, it would need to catapult 14.9%.

Why might these figures be important? For one thing, 6 months ago, most of the ETFs in Morningstar's ETF valuation ratings were "Undervalued." Today, that designation is reserved for the least volatile segments like Health Care (NYSE: XLV), Consumer Staples (NYSE: XLP) and Telecom (NYSE: IYZ).

Second, dividend investors might be persuaded by a 4.3% annualized yield on IYZ. With projected capital appreciation, and a payout that is comparable to a 30-year U.S. treasury, what's truly more attractive?

(Note: Keep in mind, a 30-year U.S. treasury purchased today would likely experience a decline in price, limiting one's ability or desire to liquidate. Meanwhile, the same yield on IYZ comes with a probability of capital appreciation over time.)

 

If you'd like to learn more about ETF investing... then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. The content does not represent investment advice, nor are the securities discussed suitable for every investor. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.