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Global Telecom ETF

Written By Brian Hicks

Posted March 23, 2009

You can learn a lot about investing in global telecom stocks by watching soccer…

Britain’s Vodafone (NYSE:VOD), Spain’s Telefonica (NYSE:TEF), and Germany’s T-Mobile (NYSE:DT) all jockey for jersey placement in the world’s top leagues, giving fans a constant reminder which companies are aligned with their teams. As with NASCAR’s ad-laden auto racers here in the U.S., phone service providers hope team fervor translates to brand loyalty.

In sports and business, though, sometimes the best teams have to be pieced together to combine their strength…

That’s why Vodafone and Telefonica just announced a blockbuster deal to share network infrastructure across Europe. Both companies’ stock soared on the news, and so did an international telecommunications all-star ETF, as you’ll see below.

Just as Manchester United and Arsenal players can still have it out in league play but share their prowess when it comes time to don England’s jersey, Vodafone and Telefonica are maintaining a competitive spirit even while they recognize a major mutual benefit.

Hundreds of millions of dollars in savings will come to both companies through the infrastructure tie-up, eliminating coverage gaps and allowing them to concentrate on retail customer service in Germany, Spain, Ireland, the UK, and possibly the Czech Republic.

In a joint statement Monday, Vodafone and Telefonica asserted the two "will continue to compete strongly against each other in local markets, while giving [their] customers enhanced mobile coverage in more places, using fewer mast sites."

They’re also piggybacking on existing regulatory clearances, sharing signal radius without changing the nature of either company’s international operations. That’s a big deal in today’s increasingly protectionist business environment, where a political permit roadblock could mean millions in lost revenue and opportunity cost.

Unfortunately, if you’re in the wrong telecom ETF, you could be missing out on the benefits to both of these worldwide companies.

Choosing the Right Global Telecom ETF

The iShares Dow Jones U.S. Telecom ETF (NYSE:IYZ) has been outperforming the S&P 500 over the past six months, which is good.

But it’s not as good as the performance of its more internationally diverse cousin, the iShares S&P Global Telecommunications Sector ETF (NYSE:IXP).

In this chart, we see how well IYZ, IXP, and the S&P have done from fall into early spring. Clearly the IXP has recovered higher from the market’s mid-November swoon.

ixp etf chart

With over 10% of its allocation in each, IXP will reap the benefits of Vodafone and Telefonica’s infrastructure sharing in Europe. But the fund also gives you plenty of U.S. exposure, as the top holding is AT&T (NYSE:A). Deutsche Telekom, which operates internationally as T-Mobile, is also in the mix.

On top of all that upside potential, there’s more to IXP than the fund’s company-by-country breakdown will tell you. As is the case with all of the elite global ETFs, this global telecom team gets its kick from emerging market investments that stretch far outside London, Madrid, or Berlin.

Vodafone, through its many African subsidiaries, is actually the major force behind much of that continent’s "leapfrog" mobile phone market expansion. That is, Vodafone is profiting from the fact that most African customers are using their mobile handset as the primary means of communication, skipping fixed-line service altogether.

Over 75% of small business owners in Sub-Saharan Africa use cell phones as their only line, not only for convenience but also because of shoddy local fixed-line infrastructure. And Vodafone is in prime position to take advantage of world-leading growth rates in Africa’s developing markets.

In fact, some technology already in use in those emerging markets hasn’t caught on yet in the richest countries. . . Phone-to-phone payments are common in Kenya, and migrant workers can communicate with their families both to talk and to send money home in just seconds.

Telefonica, for its part, has done a great job of expanding into Spanish-speaking countries in Latin America. Like the O2 brand Telefonica operates in the UK, Telefonica’s Latin Movistar subsidiary is all over soccer shirts in Latin America. Movistar is the largest operator in several Latin countries, helping to balance out a Spanish market that is reeling from a monumental real estate collapse and an overall financial malaise in the past year.

In this recession, money still talks, and so do people.

Make sure you dial the right number to reap the benefits of global telecommunication trends we see unfolding, even during slow economic times.


Sam Hopkins

P.S. – If there’s a financial newsletter all-star team, you can bet my colleague Ian Cooper would be on it. The market can go up or down and Ian’s Options Trading Pit subscribers know exactly when and how to lock in profits most investors only dream about—even in bull markets. Ian’s strategy is global and comprehensive, and he really grasps the leading trends like telecoms that keep developing despite bumpy earnings reports and Capitol Hill chaos. To learn more about OTP, click here.