How to Invest in Global Telecom
The telecommunications industry is only growing in importance around the world, from simple cellular phones to so-called machine-to-machine ("M2M") technologies. Gartner analysts believe that global telecom will continue to be the largest information technology ("IT") spending market in 2013, with mobile data representing a third of the market. In fact, Ovum Research projects that mobile broadband will grow at a 19.2% clip, generating some $122.9 billion in incremental revenue between 2013 and 2016.
The industry is also growing increasingly global in scope, with emerging markets expected to account for nearly 90% of all new mobile connections in 2013. For example, Brazil's mobile market will reach a density of more than 130 lines per 100 inhabitants, with annual growth in excess of 10% in 2012, according to a report by Market Research Reports. However, just three companies control 70% of the total revenues and none of them are U.S.-based carriers.
Exchange-traded funds ("ETFs") represent one of the easiest ways to invest in global telecommunications without worrying about finding companies in every market. Traded on U.S. exchanges, these ETFs hold a basket of telecom equities around the world, providing automatic diversification within the sector. While there are many different ETFs available targeting this space, the most popular is the iShares S&P Global Telecom Sector Index Fund (IXP).
The IXP ETF has approximately $469 million in assets under management, as of April 2013, with a slightly higher than average expense ratio of 0.48%.
With 38 different companies in its portfolio, the ETF offers investors significant diversification across the United States (35.62%), United Kingdom (14.94%), Japan (8.16%), Canada (6.49%) and other major countries. However, investors should note that the three largest holdings hold over 40% of the portfolio's value.
Other popular ETFs to invest in global telecom include:
Investors looking for a more hands-on approach to investing in global telecom ETFs may want to consider American Depository Receipts ("ADRs"), which are essentially foreign equities that trade on U.S. stock exchanges. Many large and popular global telecom giant have ADR shares listed in the U.S., making it relatively easy to build a global telecom portfolio that has exposure only to specific countries and markets rather than broad exposure.
Some popular ADRs to invest in global telecom include:
Governments largely control the global telecom market, since telecom tends to be a highly regulated industry, even in the United States. As a result, international investors face an element of geopolitical risk in changing telecom regulations, either encouraging or discouraging competition from occurring in the marketplace. Both of these dynamics are at work in various countries around the world and should be carefully considered.
A second key risk to consider is competition itself. Since the telecom market is rapidly growing, many different companies are vying for a stake in the profit potential. Smaller companies that were previously dominating a space could face sudden and intense competition from larger global telecom players in some cases. And in other cases, the opening of the market to new competition can result in rapid saturation, reduced revenues and tightened margins.
The industry is also growing increasingly global in scope, with emerging markets expected to account for nearly 90% of all new mobile connections in 2013. For example, Brazil's mobile market will reach a density of more than 130 lines per 100 inhabitants, with annual growth in excess of 10% in 2012, according to a report by Market Research Reports. However, just three companies control 70% of the total revenues and none of them are U.S.-based carriers.
Investing in Global Telecom with ETFs
Exchange-traded funds ("ETFs") represent one of the easiest ways to invest in global telecommunications without worrying about finding companies in every market. Traded on U.S. exchanges, these ETFs hold a basket of telecom equities around the world, providing automatic diversification within the sector. While there are many different ETFs available targeting this space, the most popular is the iShares S&P Global Telecom Sector Index Fund (IXP).
The IXP ETF has approximately $469 million in assets under management, as of April 2013, with a slightly higher than average expense ratio of 0.48%.
With 38 different companies in its portfolio, the ETF offers investors significant diversification across the United States (35.62%), United Kingdom (14.94%), Japan (8.16%), Canada (6.49%) and other major countries. However, investors should note that the three largest holdings hold over 40% of the portfolio's value.
Other popular ETFs to invest in global telecom include:
- SPDR S&P International Telecom Sector ETF (IST)
- iShares MSCI ACWI ex-U.S. Telecom Sector Index Fund (AXTE)
Investing in Global Telecom ADRs
Investors looking for a more hands-on approach to investing in global telecom ETFs may want to consider American Depository Receipts ("ADRs"), which are essentially foreign equities that trade on U.S. stock exchanges. Many large and popular global telecom giant have ADR shares listed in the U.S., making it relatively easy to build a global telecom portfolio that has exposure only to specific countries and markets rather than broad exposure.
Some popular ADRs to invest in global telecom include:
- America Movil SAB de CV (AMX)
- Telefonica SA (TEF)
- Vodafone Group plc (VOD)
- China Mobile Ltd. (CHL)
- Softbank Corp (SFTBF)
Important Risks to Consider
Governments largely control the global telecom market, since telecom tends to be a highly regulated industry, even in the United States. As a result, international investors face an element of geopolitical risk in changing telecom regulations, either encouraging or discouraging competition from occurring in the marketplace. Both of these dynamics are at work in various countries around the world and should be carefully considered.
A second key risk to consider is competition itself. Since the telecom market is rapidly growing, many different companies are vying for a stake in the profit potential. Smaller companies that were previously dominating a space could face sudden and intense competition from larger global telecom players in some cases. And in other cases, the opening of the market to new competition can result in rapid saturation, reduced revenues and tightened margins.
Key Takeaway Points
- The global telecom market is rapidly growing in many different ways, from market saturation in emerging markets to new technologies in developed markets.
- Global telecom ETFs represent the easiest way to gain broad exposure to the market, while ADRs offer investors exposure to individual companies and markets.
- Before investors, it's important to realize that the global telecom sector is typically a highly regulated industry subject to intense competition.