Telecom bulls were treated Thursday to an analyst-beating earnings report from AT&T ( T). In the report, AT&T pointed to continued strength in demand for wireless devices, in particular Apple's ( AAPL) iPhone. Following up its strong second-quarter numbers, AT&T raised its full-year outlook. On Friday, investors will have their ears to the ground again as Verizon ( VZ) reports its own second-quarter performance prior to the opening bell. With the most recent wave of smartphones hitting markets over the past few days, lines have been drawn and sides picked -- smartphone giant Apple and technology titan Google ( GOOG) have paired up with AT&T and Verizon, respectively, as the iPhone 4 and Droid X viciously compete for consumer attention. In the midst of this battle, the broad telecommunications industry has been brought into the limelight. The iPhone had the distinct advantage of hitting markets before Droid X, but the iPhone has been plagued by poorly resolved reception issues. Additionally, AT&T has been the iPhone's exclusive cellphone carrier since 2007, effectively initiating the "team picking" we have seen manifest as these products emerge. Meanwhile, the Droid -- a joint effort of Verizon, Motorola ( MOT) and Google -- only minimally suffered from technical road bumps as the companies promptly addressed a rare screen malfunction. Curiously, despite the allure of past iPhones, Verizon has managed to steadily increase its share of the smartphone market, to 26% in May from 20% in late 2008. Over this same time frame, AT&T's market share slipped to 40%, down from roughly 45% (although these statistics do not take the iPhone 4's release into account). As Verizon reported, its brand new product suffered a brief technical hiccup, albeit on a much smaller scale than AT&T's featured competitor. Verizon Wireless and Motorola recently acknowledged that less than a tenth of 1% of their new Droid X smartphones have malfunctioning display units, resulting in what many express as a "flickering" of the LCD. However, as opposed to denying the problem, only to later hand out phone accessories, the companies quickly resolved the technical issue, offering to completely replace the small fraction of defective units. With this fix coming into fast effect (the problem was identified immediately after sales began), the Droid X continues to enjoy high demand since its initial launch last Thursday.
In comparison, Apple took over three weeks to "fix" its reception issues; CEO Steve Jobs waited for a solid 22 days before offering customers a complementary case for the iPhone 4 to address shoddy antenna engineering. Because of the relative rarity of the Droid's problems and the near fanatical loyalty of Apple fans, I am confident that neither technological malfunction will make a lasting dent in either company's stock or sales. As I have noted in past articles, one of the best ways to play this burgeoning market is to distance oneself from the emotion of heated brand competition, instead opting for investment strategies that cover the broader telecom sector as a whole. The iShares Dow Jones U.S Telecom Sector Index Fund ( IYZ) and the Vanguard Telecom Services ETF ( VOX) both provide ample exchange-traded fund exposure to the sector, while those with an inkling for mutual funds can look to the Fidelity Select Telecom Portfolio ( FSTCX). All three of the funds are heavily dependent on their top positions, dedicating a respective 65%, 74%, and 66% of their assets to their top 10 holdings. When comparing the two ETFs, both funds' top holdings tend to largely overlap. However, if investors do their homework, they will notice small variations in their weightings. IYZ's top five holdings include AT&T (15.2%), Verizon (11.9%), American Tower ( AMT) (7%), Sprint Nextel ( S) (5.6%), and Centurylink ( CTL) (5.1%), and it trades with an expense ratio of 0.48%. Although the fund has incurred year-to-date losses of 0.72%, it has been gradually gaining momentum since a rebound in early 2009. Meanwhile, VOX's top 10 holdings are largely similar, varying only by weighting and order of holding percentage. The fund's top portfolio components include Verizon (22.8%), AT&T (21.9%), American Tower (5.2%), Sprint (4.4%) and Crown Castle International ( CCI) (4.3%). VOX has performed slightly poorer than IYZ on a year-to-date basis, incurring losses of 1.73%. The fund is also smaller, with total net assets at $220.3 million, as compared with IYZ's $522.69 million. VOX trades with a notably lower 0.25% expense ratio. Although more expensive, I consider IYZ, being larger and less dependent on the performance of AT&T and Verizon, to be the stronger of these two ETF products.
Relative to its ETF cousins, FSTCX has landed itself between the two funds, with a year-to-date net asset value loss of 1.09%. Telecom bulls wary of using ETFs would have no problem satisfying their thirst for wireless with this fund. Similar to IYZ and VOX, this mutual fund option boasts heavy exposure to firms including AT&T, Verizon, Sprint, and American Tower. It is important to keep in mind, however, that this fund charges investors a 0.75% redemption fee on shares held less than 30 days. Although these products may have suffered on a year-to-date level, it is nonetheless important to note an underlying positive trend since early 2009. Hopefully, the latest wave of smartphones may be the push that telecom funds need to reverse recent short-term trends and perform positively.