Net Neutrality Could Mean Lost Calls For Telecom ETFs

Thanks in large part to tumbling Treasury yields and investors' desire for lower beta sectors, telecommunications exchange-traded funds, the often overlooked options of the sector ETF universe, are soaring this year.

For example, the Vanguard Telecommunication Services ETF VOX is higher by nearly 13 percent this year, making it one of the best-performing sector ETFs that is not a dedicated utilities fund. Like their consumer staples and utilities counterparts, telecom ETFs lure investors with tempting dividend yields.

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VOX has a trailing 12-month dividend yield of 3.76 percent, which is 230 basis points above yesterday's closing yield on 10-year Treasurys. With a dividend yield of 2.27 percent, the rival Fidelity MSCI Telecommunication Services Index ETF FCOM still looks attractive relative to U.S. government debt.

However, the U.S. Court of Appeals for the District of Columbia's recent decision to uphold net neutrality rules could crimp telecom ETFs. The good news is the net neutrality ruling is not expected to have an adverse impact on telecom providers' revenue.

Related Link: AT&T Will Take Net Neutrality Issue To The Supreme Court

The “decision to uphold net neutrality rules could affect telecom investment plans but will have no immediate impact on revenues, according to Fitch Ratings. Earlier this month, the court upheld the Federal Communications Commission's (FCC) open Internet rules and reclassification of services under Title II regulation,” said Fitch Ratings in a recent note.

Net Neutrality

As Benzinga reported earlier this month, telecom companies and broader industry groups can request for a rehearing, due for July 29. If they are unsuccessful, they are expected to request for an intervention by the Supreme Court, around mid-September.

AT&T Inc. T has been particularly vocal against the recent net neutrality ruling, stating its intention to pursue intervention by the Supreme Court. That is of note to investors in telecom ETFs because AT&T and Dow component Verizon Communications Inc. VZ often combine for excessive percentages of these funds. In the case of VOX, the Vanguard telecom ETF, AT&T and Verizon combined for 44.7 percent of that ETF's weight as of the end of May.

“Another negative aspect for investors in the long term would include the reduced opportunity for wireline or wireless operators to benefit from potential new business models that deliver targeted advertising. These operators could potentially be at a disadvantage relative to edge providers such as Google or Facebook,” added Fitch.

Investors have added over $470 million to VOX this year and over $70 million to FCOM.