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Why Are Telecom ETFs Significantly Outperforming the Market?

NEW YORK ( ETF Expert) -- Telecommunication service providers from Verizon (VZ) to AT&T (T) to Sprint Nextel (S) have rocketed over the last three months.

Some attribute the share price appreciation to investor thirst for high dividend yields. Others regard telecom as a non-cyclical sector like health care and staples, where economic concerns may be driving participants toward safer havens.

Then again, there may be multiple reasons for the "tele-tremendous" results. Sprint's second-quarter earnings and revenue crushed expectations, sending company shares into orbit. Gains have approximated 30% over the previous five trading days.

Similarly, worldwide demand for wireless services is so strong, cellphone tower owners like American Tower (AMT) benefited from 17% second-quarter growth in sales.

In other words, unquenchable desire for more and more mobile data usage is likely boosting telecom's success.

That said, there have been noteworthy patterns of performance in the leading Telecom ETFs like Vanguard Telecom (VOX) and iShares DJ Telecom (IYZ).

Consider the relative strength of VOX in the second quarter of 2012 as evidenced by the VOX:SPX price ratio below.

Now take a look at the same three-month period (April 1 to July 1) for 2010...

and 2011...

The pattern is unmistakable. We can debate the reasons why telecom out-hustles the broader S&P 500 in the second quarter. Some will say it is a function of "sell in May and go away," whereby less-risky segments (e.g., health care, staples, telecom, utilities, etc.) thrive. Others will say that it has more to do with anticipating prominent smartphone introductions and the effect that those introductions may have on the wireless data carriers.

Personally, I'm not too sure that it matters. The fact remains that the telecom train tends to be spectacular from the early spring through the early fall. And for those who have a plan to enter as well as exit positions, rather than buy-and-hold, both Vanguard Telecom and iShares DJ Telecom are reasonable "seasonables."

Keep in mind, though, both VOX and IYZ tend to underachieve in higher beta "risk-on" rallies. What's more, they even fare worse than the S&P 500 in panic selloffs where babies get tossed out with their tub toys.

From a pure valuation standpoint, it's hard to argue that Telecom ETFs are a bargain. The 3% yields may be more attractive than the market, yet the immense weighting of Verizon and AT&T in these exchange-traded vehicles leaves little room for mis-steps. If you buy today, be sure to place a trailing stop-limit loss order .

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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