Morgan Stanley Capital International US Investable Market Telecommunication Services 25

Several industry researchers from Global Industry Analysts Inc. estimate that the market size of the global telecommunications industry might reach $1.8 trillion in the straightway three years. The U.S. telecommunications industry will continue to hold the largest share of it. According to market innovation.com , U.S. telecom revenue is expected to grow about 3.9% per year to reach roughly $1.2 trillion by 2020 from the current $750 billion.

Majority of the future growth of the telecom industry depends on the wireless business as subscribers are discontinuing landlines and moving quickly to wireless connections. The present wireless market is ready for the on-going boom in the wireless data space with the growing broadband services.

The demand for data traffic is growing in leaps

The demand for data traffic is growing in leaps and bounds and has more than doubled over the last three years. Even though the carriers are facing hurdles in managing the rising mobile data traffic amid stiff competitive pressures and limited wireless spectrum licenses, it is creating new growth opportunities for them. These include IPTV offerings, cloud computing, video conferencing, online video telecom streaming and managed telepresence.

Carriers like Verizon Communications Inc., CenturyLink Inc. and AT&T Inc. are rapidly entering into the cloud computing space, which is now a business prerequisite in other words high on demand. The global cloud computing market is currently estimated at in broad outline $37 billion and is expected to hit $121 billion by 2015 at a growth rate of roughly 26% per annum. Major players just as Apple Inc. and Google Inc. are gaining increased traction, and are enabling the developments in mobile cloud computing. Additionally, managed telepresence services are gaining popularity and are expected to reach market capitalization of in broad outline $1.5 billion by 2016, with an annual growth rate of approximately 25%.

Further, smartphones, in particular iPhones and Android-based handsets, tablets and 4G LTE (Long Term Evolution, latest standard in the mobile network technology) are facilitating the companies to boost market share over the then several years. As the smartphone market is growing rapidly, companies are progressing fast to acquire more spectrum licenses to meet the explosive growth of Internet-connected smartphones and tablet computers. As a result, the US Congress eased spectrum access last month for straightway generation wireless networks, which would expand data services to a greater number of clients.

Besides, the LTE deployments will allow the global carriers to take advantage of the new and unused spectrums during expanding their abilities to deliver the strongest and the most advanced networks. Just in case, enhancing network capabilities will lead to creation of new opportunities, economies of scale and will open up markets that were before inaccessible.

The ongoing developments

We believe the ongoing developments and inventions aimed to upgrade the existing network infrastructure would boost wireless growth prospects in the years ahead.

Additionally, telecom U.S. operations are subject to regulations by the Federal Communications Commission and other federal, state and local agencies. The 4G infrastructure, which has become the principal at once-generation global standard, may be an obstacle if other service providers shift to different generation technologies.

The economy in future

As telecom sector is expected to outpace the economy in future, investors seeking solid returns on their investment might consider telecommunications industry Exchange Traded Funds.

Telecom ETFs allow investment in a basket of telecommunications companies, which has a significant stake in telephone and internet products, services and technologies. There are three types of telecommunication ETFs.

Vanguard Telecommunication Service ETF tracks the Morgan Stanley Capital International US Investable Market Telecommunication Services 25/50 Index. Introduced in September 23, 2004, the ETF holds 36 stocks that provides wireless, high-speed, fiber-optic cable, fixed-line and cellular services, with 71.81% concentration in top 10 companies. Top holdings include Verizon, AT&T and Crown Castle International. The total assets as of March 5, 2012 were $431.2 million. This ETF has a below average expense ratio of 0.19% compared to its category average of 0.47%. The fund generated 0.25% return over 1-year period. This has outpaced 1-year index return of 0.12%.

iShares Dow Jones U.S. Telecom tracks the performance of the US wireline and wireless telecom stocks as represented by the Dow Jones U.S. Select Telecommunication Index. The fund invests 69.83% in top 10 holdings with the largest concentration in AT&T, Verizon and CenturyLink. It charges slightly higher 0.48% compared to category average of 0.47%. The total assets as of March 5, 2012 were $575.7 million representing 30 holdings. The ETF has underperformed its benchmark over the past year with annualized returns of 0.41% as compared to the index return of 0.82%.

Focus Morningstar Communication tracks Morningstar Communication Services Index. The fund consists of 35 internet services provider companies with $5.1 million of assets in accordance with management, as of March 5, 2012 and charges low fees of 0.19%. The largest holdings are AT&T, Verizon and Comcast with 18.91%, 12.04% and 8.46% of assets, respectively. FCQ, launched on March 30, 2011, has outperformed its index, producing substantial 8.58% returns since inception.

First Trust NASDAQ CEA Smartphone tracks NASDAQ OMX CEA Smartphone Index. It seeks investments in companies including telecom service providers, vendors and manufacturers that are engaged in smartphone activity. Initiated in February 17, 2011, the fund holds 69 stocks with expenses ratio of 0.70%. The top three holdings include Benchmark Electronics, Sanmina-SCI Corp and Wistron Corp. Since its launch in February 17, 2011, the ETF has yielded negative 13.01% return compared to the negative 12.30% index return.

The returns

SPDR S&P Telecom ETF seeks to match the returns and attributes of the S&P Telecom Select Industry Index. Initiated in January 26, 2011, the fund has 58 holdings with total asset value of $6.8 million and expense ratio of 0.35%. The top 10 holdings include Level 3 Communications, Leap Wireless, Harris Corp, Polycom, Finisar Corp, Ciena Corp, MetroPCS Communications, JDS Uniphase Corp, Crown Castle and Tw Telecom each having uneven concentration in the range of 2.3%-2.6% of assets. The fund had underperformed its benchmark with negative returns in one-year period.

iShares S&P Global Telecommunication tracks the performance of global telecommunication market and includes diversified and wireless communications companies. It replicates S&P Global Telecommunications Sector Index and consists of 48 holdings with assets of $423.7 million as of March 5, 2012. Roughly 68.03% of funds were allocated to the top 10 holdings. The three largest ones are AT&T, Vodafone and Verizon with 16.25%, 12.17% and 9.68% weights respectively. The fund has substantial global exposure with 30.46% in United States, 14.77% in United Kingdom, 7.90% in Japan, 6.25% in Canada, 6.22% in Spain, 5.20% in Mexico, 5.17% in France 8.70%, 4.99% in China, 4.05% in Australia, 3.17% in Germany and 11.82% in other countries. The ETF has an average expense ratio of 0.48% compared to its category average of 0.47%. The fund yielded a 1.22% return in 2011 compared with index return of 1.13%.

The performance of S&P Developed Ex-U.S.

SPDR S&P International Telecommunication tracks the performance of S&P Developed Ex-U.S. Broad Market Index Telecommunication Services Sector Index. The index consists of non-US telecom companies in developed and emerging markets having market capitalization of anyway $100 million. The three largest holdings of top 10 stocks include Vodafone, Telefonica and Deutsche Telekom with 21.27%, 10.69% and 5.43%, respectively. The fund is broadly diversified across many countries - United Kingdom with 27.29% weightage, Japan 14.29%, Spain 10.69%, France 8.70%, Canada 6.27%, Germany 5.66%, Sweden 3.77%, Singapore 3.29%, Italy 2.84%, Netherlands 2.53% and other 14.67%. The total assets as of March 5, 2012 were $14.7 million representing 61 holdings. The fund's expense ratio is 0.50%. The ETF produced a negative annualized return of 7.49% compared with the negative 6.81% index return.

iShares MSCI ACWI ex US Telecom tracks the MSCI All Country World ex USA Telecommunication Services Index. The fund includes 93 non-US telecom stocks, which are willingly available for trading in developed and emerging markets with 54.17% concentration risk in top 10 companies. The total assets as of March 5, 2012 were $2.66 million. Top holdings include Vodafone, Telefonica and China Mobile. Country wise, the fund is exposed to United Kingdom, Japan and China, and lesser extent to South Africa, Germany and Singapore. The fund's expense ratio is 0.48%. The fund had underperformed its benchmark in 2011.

The nine ETFs discussed above

Of the nine ETFs discussed above, we would recommend FCQ. Although bid-ask spread is little bit higher, the fund charges in the extreme low fees, trades in large volumes and outperformed its index year-to-date. FCQ represents the basket of stocks that provide internet services just as access, navigation and internet related software and services. The demand for broadband internet services including video streaming and cloud computing is riding high, which will boost subscriber accretion and improves churn rate. This would ensure higher returns in the medium to long-term.