Introduction
Exchange Trade Funds (ETFs) are mutual funds that trade like stocks and represent grouped securities. They have a net asset value that is calculated at the conclusion of every trading day and their prices fluctuate depending on the balance between supply and demand (Beers, 2022). ETFs can be diversified, as is the case in mutual funds, and they are flexible like stocks. In addition, owners can short-sell or buy them on margin. It is worth noting that compared to average mutual funds, most ETFs have lower expense ratios (Beers, 2022). Finally, ETFs have the same commission rate as regular trades.
Communication Services
The communications services sector is made up of five industries. They include the interactive media and services industry, which experienced a 3.23% change, and the entertainment industry, which experienced a 4.64% change (Fidelity, 2022a). The third industry is the media industry, which experienced a 3.12% change, while the fourth is the wireless telecommunications industry, which experienced a 2.14% change (Fidelity, 2022a). The final industry is diversified communications services, which experienced a 1.07% change (Fidelity, 2022a). The entire sector saw a positive 3.17% change (Fidelity, 2022a). It should be noted, however, that all the industries in the sector recorded negative values of percentage change in the year to date.
Barriers to Entry
Barriers to entry are particularly burdensome to small firms. High licensure and compliance costs force new companies to allocate significant portions of their financial resources to ensure they remain compliant with the stipulations provided by the Securities and Exchange Commission and the Consumer Financial Protection Bureau (Mansa, 2022). Deregulation and the re-introduction of banking interstate banking restrictions discourage firms from entering the market. Most technology companies encounter high fixed costs in their attempts to establish and provide wholesale financial services (Mansa, 2022). The main supply challenge organizations face is recurrent cross-border complexities that place challenges on the legalities of vital purchase-based techniques, which limits access to clients.
Position in the Economy
The communications services sector is made up of companies that offer a variety of communications services through cellular, fixed line, wireless, and fiber optic networks (Fidelity, 2022b). It includes organizations that provide television and broadcasting services, public relations, advertising, publishing, and computer database products. The enterprise value in the communications sector stands at $494.56 billion, while revenue growth was recorded at 18.89%, which is good considering the degree of competition in the sector (Fidelity, 2022b). It is vital to note that the return on equity in the sector was recorded at 19.07%, while the industry dividend yield is at 6.80% (Fidelity, 2022b).
History of Major Companies: Defiance Next Gen Connectivity (FIVG)
Defiance Next Gen Connectivity (FIVG) prioritizes 5G technology companies in their investments. The company has net assets to the tune of 872.60 million dollars in addition to having a total of 25,900,000 outstanding shares (Fidelity, 2022c). The company’s top holding is Qualcomm Inc. at 5.01% followed by Analog Devices Inc. at 4.84% and Advanced Micro Devices Inc. at 4.39%. On the 21st of September 2022, FIVG announced a $0.1029 distribution (Fidelity, 2022c). The company’s top country is the United States of America, which represents 81.32% of its investments, and its top sector is information technology (Fidelity, 2022c).
History of Major Companies: Ishares Trust Dj U.S. Telecom (IYS)
Ishares Trust Dj U.S. Telecom (IYS) has net assets worth 381.03 million dollars (Fidelity, 2022d). It is vital to note that the company has 21,450,000 outstanding shares (Fidelity, 2022d). Its top holding is Cisco Systems Inc. at 14.96%, followed by Verizon Communications Inc. at 13.99% and Comcast Corp Class A at 12.98% (Fidelity, 2022d). On the 26th of September 2022, IYS announced a $0.0979 distribution (Fidelity, 2022d). The company’s top country is the U.S. at 100% and its top sector is communication services (Fidelity, 2022d). The company’s total returns in the past year stood at -26.62% and +2.83% for the past 10 years (Fidelity, 2022d).
Recent Financial Recession
The recent financial recession popularized ETFs. In 2008, ETF investments were estimated to be worth 531 billion dollars, a figure that grew to 3.4 trillion dollars in 2018 (Borzykowski, 2018). The financial crisis saw investors shift from mutual funds because they were unprotected during downturns, which cost them heavily. Investor interest in unbiased advice resulted in a preference for fee-only business rather than commissions (Borzykowski, 2018). The focus shifted to index alternatives, thus promoting the need to keep client fees low (Borzykowski, 2018). The numerous advantages associated with ETFs make them most people’s preferred investment vehicles, particularly after the recent financial recession.
The COVID-19 Pandemic & Fed Increases
The COVID-19 pandemic adversely affected markets across the globe as nations struggled to address the health crisis. One key observation was the drop in ETF efficiency between February and March when the pandemic spread rapidly across the globe (Saha et al., 2022). The decline in informational efficiency for ETFs was markedly higher in the U.S. and Canada compared to those in Japan, China, South Korea, and Hong Kong (Saha et al., 2022). It should be noted, however, that the degree of informational efficiency increases towards the end of the plots, highlighting the fact that there is a significant decline in market imperfections as the pandemic eases.
The recent Fed increased caused fixed-income yields to plummet as the dollar’s purchasing power declined. Investors are turning away from fixed income investments and instead choosing short-duration investments, which are relatively safer. It is worth noting that as a result of government intervention, cyclical ETFs have gained 53 billion dollars in inflows, meaning they are likely to remain stable in the event of a market downturn (Mathews, 2021).
Interest Rates and Inflation
Current interest rates are rising rapidly as governments attempt to tame inflation. It is vital to note that high interest rates hurt high valuation stocks the most. The most common mechanism through which this occurs is the discounting of future cash flows (Mazza, 2022). It is often the case that high interest rates result in low stock prices, meaning that cash flows are discounted at significantly higher rates. Growth stocks are particularly vulnerable to high rates given the fact that future revenues lose value in today’s dollars (Mazza, 2022). As a result of high interest rates, ETFs from small companies have lost the most value. Trade balances cause shifts in exchange rates that impact stock prices given the fluctuation in currency value.
Financial advisors are immensely concerned about inflation, as opposed to geopolitics and recession risk, according to a recent survey (Mathews, 2021). It is vital to note that rising inflation often affects stocks negatively. Economic growth has spurred profitability in small-cap stocks.
Future Recovery Plans
In order to recover from financial losses as a result of a poor market, it is important to avoid selling during a market crash. It is essential to grab unique opportunities during market crashes, especially when valuable ETFs are presented at steep discounts. Investors must always dollar-cost average all purchases, which refers to the process of buying at a set dollar value are consistent intervals, even when the market conditions seem unfavorable. It is vital to prioritize the search for quality dividends and always try riding the sector rotations On occasion, investors should cut losses during crashes, provided the conditions are right.
Opinions on the Future
Investing in communication sector ETFs is wise considering the profitability that affiliated companies are likely to experience in the future. Aside from the numerous advantages that ETFs provide, communications service companies are innovation pioneers. The industry is always at the top of technological advancements, whose growth is attributable to the spread of the internet. This has facilitated the rapid growth of mobile companies and the entry of new players into the market. It is also worth noting that wireless technology is the future, given the ease with which it blends with expanding smartphone technologies.
Conclusion
Exchange Traded Funds offer numerous advantages, such as the flexibility of stocks and the diversity of mutual funds. The communications services sector offers diversity owing to the variety of industries its supports and the high number of participating companies. The COVID pandemic affected ETFs adversely, especially in the United States and Canada. It is worth noting that the recent recession popularized ETFs, as evidenced by the rise in investment value. Despite their popularity, most ETFs are negatively impacted by inflation and interest rates. Communications sector ETFs are wise investments, given the fact that communication service companies are the future.
References
Beers, B. (2022). Introduction to Exchange-Traded Funds (ETFs). Investopedia. Web.
Borzykowski, B. (2018). The trillion-dollar ETF boom triggered by the financial crisis. CNBC. Web.
Fidelity. (2022a). Communication services industries. Web.
Fidelity. (2022b). Communication services snapshot . Web.
Fidelity. (2022c). Defiance Next Gen Connectivity ETF (FIVG). Web.