It's No Time to Call on Telecom ETFs

Indeed, as AT&T has fallen 22% for the year and Verizon has given back 18%, nearly every telecom ETF has dropped with them. The iShares Dow Jones U.S. Telecom Sector Index and the Vanguard Telecom Services are down 17% each in 2008 -- and the Telecom HOLDRs has slumped more than 21%.

"It's very hard to move the dial when you have two companies that are such big weights," says Charles Brown, vice president of investments of Johnson Illington Advisors. "Everything else is just incremental at the margins. Even if something smaller moves, it's not going to have that big of an impact on the ETF because AT&T and Verizon dominate the weightings of those ETFs."

It doesn't bode well then for either AT&T or Verizon, that Brown says he isn't enthusiastic about the prospects for the telecom industry. His firm's strategy requires it to own some telecom ETFs and shares of Verizon, despite his dour view.

"Verizon has been going around laying fiber optic cable, which was a very large capital expenditure for them," Brown says. "Verizon is closer to an inflection point than not, but it seems to be the dog with the least amount of fleas, if you will."

Brown's big-picture view of telecom is that it's a commodity product, making it hard to differentiate individual companies' offerings. "Additionally, competition keeps driving down the price. It's very hard to have any sort of competitive advantage in this industry," he adds.

For DAL Investment's Browne, expecting a turnaround now in telecom ETFs is akin to "trying to catch a falling knife. If I'm going to buy a sector fund right now, I'd feel a lot more comfortable waiting for a breakout rather than trying to catch that knife."