Telecom gets disconnected

Telecom stocks have failed to keep pace with the overall market in the second half of 2009.

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Since June 30, the iShares Dow Jones U.S. Telecom Sector Index Fund (IYZ) is only up 3% compared to an 18% gain for the SPDR S&P 500 (SPY).

The $500 million telecom ETF counts a variety of U.S. based service providers and equipment suppliers among its 33 holdings.  Top investments include AT&T and Verizon.

The lackluster performance on the part of telecom stocks is partially due to the decline in the wireline business as customers increasingly disconnect their landlines in favor of cell phones.  The traditional wireline business also faces competition from low-cost VoIP service providers.

AT&T has seen tremendous success from its exlusive iPhone deal with Apple.  In its third quarter, AT&T delivered 3.2 million iPhone activations and net subscriber additions topped 2 million.  However, the earnings lift from the growth in wireless has been mostly offset by declines in the legacy business.

For more ETF investing choices, see the ETF Directory for a complete list of Sector ETFs.