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Telecom ETFs Falling on Lackluster Earnings

The year has been rather mediocre for the telecom industry with lukewarm results coming up amid turbulent economic conditions. The industry has evolved as an intensely contested space where success depends largely on technical superiority, quality of services and scalability. Cut-throat pricing competition has put pressure on margins this earnings season.
 
However, mixed results and global market concerns notwithstanding, the overall sentiment for the U.S. telecommunications industry for the rest of 2016 is positive. Telecommunications is one of the few industries to have managed to undergo rapid technological improvement even during depression. In this era of digitization and technology, the ever-growing demand for technologically superior products should see the sector through.
 
Below we have highlighted in greater detail earnings of some of the major Telecom companies which really drive this sector’s outlook. (read more: What Lies Ahead for Telecom ETFs in 2016?).
 
Telecom Earnings in Details
 
U.S. telecom behemoth AT&T Inc. (T) reported impressive results beating on both the top and bottom line. Adjusted earnings per share of 72 cents beat the Zacks Consensus Estimate of 69 cents. Quarterly total revenue increased 24.4% year over year to $40,535 million, outpacing the Zacks Consensus Estimate of $40,493 million. AT&T has gained 2.1% since reporting earnings (as of May 4, 2016). Although the company reported strong results, its U.S. postpaid wireless subscriber addition of 129,000 was down a significant 70.7% year over year.
 
In contrast, U.S. telecom giant Verizon Communications Inc. (VZ) reported mixed financial results wherein the top line lagged the Zacks Consensus Estimate, while the bottom line just met the same. Verizon’s adjusted earnings per share moved up almost 3.9% year over year to $1.06, in line with the Zacks Consensus Estimate. Quarterly revenue increased 0.6% year over year to $32,171 million, but missed the Zacks Consensus Estimate of $32,367 million. The stock has fallen 1.8% since reporting earnings (as of May 4, 2016).
 
CenturyLink Inc.’s (CTL) first-quarter 2016 adjusted earnings per share of 71 cents surpassed the Zacks Consensus Estimate of 68 cents and were up 6% year over year. However, quarterly total revenue of $4,401 million fell 1.1% from the prior-year quarter and missed the Zacks Consensus Estimate of $4,426 million. The stock was down 4.71% during after-hours trading on May 4, 2016.
 
ETFs in Focus
 
Thanks to mixed results, telecom ETFs with considerable exposure to the three stocks above were all in the red in the last 5 trading sessions (as of May 4, 2016). Below we discuss four of these that will be in focus in the coming days (see all Telecommunication ETFs here).
 
iShares US Telecommunications ETF (IYZ)
 
IYZ tracks the Dow Jones U.S. Select Telecommunications Index. The fund manages assets worth nearly $617.4 million and has an average trading volume of roughly 502,000 shares a day. The fund charges an expense ratio of 45 basis points a year.
 
The fund holds 25 stocks and has more than one-fifth of its assets in the top 2 holdings while the others have less than 5.7% exposure. Among individual holdings, top stocks in the ETF include AT&T, Verizon and CenturyLink with asset allocation of 10.7%, 9.9% and 5.5%, respectively. The four major sectors of this ETF are Integrated Telecom, Wireless Telecom, Alternative Carriers and Communications Equipment with asset holdings of 50.5%, 24.7%, 18.2% and 3.8%, respectively. The product lost 0.9% in the past 5 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
 
Fidelity MSCI Telecom Services Index ETF (FCOM)
 
This ETF tracks the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth nearly $164.8 million and has an average trading volume of roughly 64,000 shares a day. The fund charges an expense ratio of 12 basis points a year.
 
The fund holds 32 stocks and has a concentrated approach in the top 10 holdings with 67.4% of the asset base invested in them. Among individual holdings, AT&T, Verizon and CenturyLink number among the top three with asset allocation of 22%, 20.8% and 4.3%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 84.9% and 15.1%, respectively. The product lost 1% in the past 5 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: High Dividend Sector ETFs Hitting All-Time Highs).
 
iShares Global Telecommunications ETF (IXP)
 
This ETF tracks the S&P Global 1200 Telecommunications Services Sector Index. The fund has nearly $418.2 million of assets under management and an average trading volume of roughly 41,000 shares a day. The fund charges an expense ratio of 48 basis points a year.
 
The fund holds 32 stocks in its portfolio and has a concentrated approach in the top 10 holdings with approximately 71.3% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T and Verizon with asset allocation of 18.5% and 15.9%, respectively. CenturyLink holds weight of 1.3%. Integrated Telecommunication, Wireless Telecommunication and Alternative Carriers are the three major sectors with asset holdings of 72.9%, 25.7% and 1.2%, respectively. It fell almost 1.8% in the last 5 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.
 
Vanguard Telecommunication Services ETF (VOX)
 
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 $1.5 billion and an average trading volume of roughly 135,000 shares a day. The fund charges an expense ratio of 10 basis points a year.
 
The fund holds 31 stocks in its portfolio and has a concentrated approach in the top 10 holdings with 69.6% of the asset base invested in them. Among individual holdings, top stocks in the ETF are AT&T and Verizon with a combined share of almost 50%. CenturyLink has the third highest share with 4.6% weight. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 67.1%, 20.3% and 12.5%, respectively. The fund lost 0.9% in the last 5 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.
 

 
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VERIZON COMM (VZ): Free Stock Analysis Report
 
AT&T INC (T): Free Stock Analysis Report
 
CENTURYLINK INC (CTL): Free Stock Analysis Report
 
ISHARS-US TELE (IYZ): ETF Research Reports
 
FID-TELECOM (FCOM): ETF Research Reports
 
VIPERS-TELE SVC (VOX): ETF Research Reports
 
ISHARS-GLB TELE (IXP): ETF Research Reports
 
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