Steer Clear of Telecoms

Investors should steer clear of the telecoms sector for the time being, due to weak momentum and poor performance.

Yesterday, I pointed out that investors are not enamored with utility stocks -- and they don't favor telecom stocks much more. In terms of long-term momentum, telecom ETFs are stronger than utility ETFs as a group, but some telecom ETFs are ranked lower than some utility ETFs, such as iShares Dow Jones U.S. Telecom (IYZ - commentary - Trade Now), the worst of the group.

Over the past three months, IYZ has gained only 1.9%. PowerShares Dynamic Telecom & Wireless (PTE - commentary - Trade Now) has gained 5.8%. iShares S&P Global Telecom (IXP - commentary - Trade Now) has advanced 6.1% and WisdomTree International Communications (DGG - commentary - Trade Now) has climbed 6.4%, the best of the bunch and still more than 2% behind the S&P 500 Index.

Unlike Utilities Select SPDR (XLU - commentary - Trade Now), though, IYZ's chart doesn't look quite as bad. IYZ is still is in an uptrend, albeit one that is accompanied by lower volume and a failure last week to break the 50-day moving average. DGG looks much better, although it too has shown signs of weakness since October. As was the case with the utility ETFs, global telecom funds benefited from euro exposure.

For IYZ, it's the large holdings in Verizon (VZ - commentary - Trade Now), with 13.66% of assets, Sprint Nextel (S - commentary - Trade Now) at 5.49%, and Qwest Communications (Q - commentary - Trade Now), with 4.8%, that hurt returns. Over the past three months, these stocks have lost 1.8%; 17.3% and 3.0%, respectively.

The future doesn't look any better for Verizon or Sprint. Verizon was hoping the Motorola Droid would prove competitive with the iPhone, but so far, sales have been disappointing and Verizon has had to double its early termination fee due to the higher cost of smart-phones. Sprint Nextel announced layoffs of between 2,000 and 2,500 employees this week and also received a warning from Standard & Poor's of a potential credit downgrade.

Hold off on this sector until there are signs of improving fundamentals or improving momentum.

At the time of publication, Dion held no positions in the stocks or ETFs mentioned.

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At the time of publication, Dion held no positions in the stocks or ETFs mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.