“Net Neutrality” Court Ruling Puts Telecom ETFs In Focus

by on April 6, 2010 | ETFs Mentioned:

In the ongoing battle between phone and cable companies and the FCC, it appears as if Comcast and its allies have won the latest round. The U.S. Appeals Court for the District of Columbia ruled in a 3-0 vote that the Federal Communications Commission (FCC) lacks the authority to determine how Comcast and other Internet providers manage their networks. According to MarketWatch, the case stems from several incidents in 2007 in which the cable and internet provider blocked some subscribers from sharing large files over the internet in what are known as peer-to-peer transactions. Comcast complained that such users took up too much capacity and slowed down the network for other customers, which eventually led to a lawsuit from free media and free internet groups.

The ruling could allow firms like Comcast and AT&T to decide how bandwidth is allocated and which sites customers can use freely, potentially permitting telecom firms to better manage their bandwidths without having to invest in costly infrastructure and network upgrades. While seemingly good news for the industry, Tuesday’s announcement had little effect on stock prices, with many of the major telecom names staying relatively flat in light trading. This collective yawn from investors is largely due to the perception that this battle appears to be heating up rather than cooling down.

According to the case ruling (PDF), in the still-binding 2002 Cable Modem Order, the Commission ruled that cable Internet service is neither a “telecommunications service” covered by Title II of the Communications Act nor a “cable service” covered by Title VI and thus is not subject to restrictions from the FCC. The FCC plans to either get the law changed to include the internet as a “telecommunication service” or get Congress to directly grant the Commission power over the industry. Furthermore, the FCC has recently proposed a national plan designed to put the Internet in every home and vastly increase connection speeds over the next 10 years suggesting that this debate is far from over as the FCC further moves into the internet’s domain.

Telecom ETFs In Focus

While telecom ETFs and media funds didn’t have much of a reaction to the recent court decision, the major components of these funds have a lot on the line as the saga unfolds. Below, we profile three ETFs to watch as the debate truly heats up:

PowerShares Dynamic Telecom Fund (PTE)

The top holding for PTE is Comcast, the firm at the center of this net neutrality controversy (it makes up just over 5% of the fund’s total assets). Other top holdings of PTE which could be impacted by the ruling are Verizon (5%) and AT&T (4.8%). PTE has one of the higher expense ratios in the category charging 0.60%. The fund is up 7.1% this year and more than 35% over the past 52 weeks.

iShares Dow Jones U.S. Telecommunications Index Fund (IYZ)

IYZ tracks the Dow Jones U.S. Select Telecommunications Index, which measures the performance of U.S. telecommunication companies including fixed-line communications and wireless communications firms. It is heavily focused on AT&T and Verizon which combine to make up roughly one-third of the fund’s total assets. IYZ charges an expense ratio of 0.48% and is up almost 2% this year.

Merrill Lynch Telecom HOLDR (TTH)

Like all HOLDRs, TTH is heavily concentrated with just under 55% of the fund allocated to AT&T and 28% to Verizon. This ETF has encountered a rocky road recently, and is down close to 4% this year and up just 1.1% over the past 52 weeks. For more information about HOLDRs, make sure to read Five Facts About HOLDRs Every ETF Investor Must Know.

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Disclosure: No positions at time of writing.