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ETF Specialist

Sector Focus: Telecom ETFs Look Compellingly Valued

Take notice of strong dividends and attractive valuations.

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As exchange-traded fund investors survey the battered U.S. equity landscape in search of sectors with solid potential upside, we believe they should take a close look at telecommunications industry ETFs, which right now offer a tantalizing combination of strong dividends, attractive valuations, and large helpings of companies with economic moats.

While there is a moderate amount of uncertainty in the industry (the U.S. Department of Justice currently is suing to block  AT&T's (T) planned acquisition of  Deutsche Telekom's (DTEGY) T-Mobile USA unit, which effectively has placed the entire telecom industry in a holding pattern), for the most part, the telecom sector has developed into a mature industry. Gone are high leverage, weak profitability, and uncertain growth potential. In their places are cash-generating machines such as AT&T and  Verizon (VZ) that long ago rolled up much of their industry and built out much of the basic infrastructure necessary to support services today, along with tower companies and small wireless carriers. As the major carriers' legacy land-line businesses have gone away, the industry has shifted to focusing heavily on the proliferation of wireless devices and Internet usage in society. And growth looks promising for major carriers, with demand for smartphones and mobile broadband still rising at an impressive clip.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.