US sector exchange traded funds that invest in telecommunications and technology stocks are at risk after Donald Trump has opposed one of the largest mergers in the sectors’ recent history.
The proposed merger is still to be reviewed by the Justice Department and potentially also the Federal Communications Commission.
The $85.4bn deal to merge US telecom giant AT&T Inc and media behemoth Time Warner Inc would make the combined entity one of the largest players in the two sectors.
The proposed merger has been described as a “bad deal”, however, by the US President-elect, according to Bloomberg. He said it would concentrate too much power in the media industry, and his chief strategist Stephen Bannon also opposes the deal, according to people close to Trump.
Shares of AT&T fell around 3.1% while Time Warner shares sank as much as 3.8% the day of the Bloomberg report (5 January), despite rallying around 10% since the election, hopeful that a Republican administration would be friendlier to the merger.
Trump’s opposition this month is not a big surprise. He said the deal was “an example of the power structure I’m fighting”, as far back as October.
If the deal comes under scrutiny when he steps into the White House, ETFs invested in these stocks could see an associated fall in value and investors would have to position themselves with this risk in mind.
There are two ETFs listed in Europe which hold almost a quarter in AT&T.
The $30.1m db X-trackers MSCI World Telecom Services Index UCITS ETF (LON: XWTS) costs 0.45% and covers 45 stocks, and almost half of them are in the US. Top holdings are AT&T (23%), Verizon Communications (19.2%) and Vodafone (5.8%). It is up 3.4% over the last three months in USD terms.
The $40m Lyxor MSCI World Telecommunications Services UCITS ETF (LON: TELW) costs 0.40%. It tracks the same index and generated 3.3% in the same period.
AT&T is present to a smaller extent in certain technology-focused sector funds. In the SPDR S&P US Technology Select Sector UCITS ETF (LON: SXLK), AT&T is the fourth largest holding with a weight of 5.4% after Apple, Microsoft and Facebook. SXLK costs 0.15% and is up 4% over the last three months in USD terms.
For very diversified exposure, the telecom giant also makes up around 1.3% of the S&P 500 Index, which is tracked by several ETF providers. The cheapest of these is the Source S&P 500 UCITS ETF (LON: SPXS) which costs just 0.05%. Time Warner makes up 0.38% of the index.
Time Warner has a heavier weighting in US consumer discretionary ETFs. For example, the $17m iShares S&P 500 Consumer Discretionary Sector UCITS ETF (LON: IUCD) holds 3.1% in the company. It costs 0.15% and is up 4.7% in three months.
Trump’s opposition to the deal is “mildly negative” but everything is up for grabs with the president-elect, Cowen & Co analyst Paul Gallant said, as reported by Bloomberg, and the review process is still in the very early stages.
The deal, if it goes ahead, would have to be reviewed by the Justice Department and potentially also the Federal Communications Commission.
Some pundits have speculated that Trump’s opposition seems to be more due to a personal grudge than concentration of power. Mr Trump has accused CNN, owned by Time Warner, of being critical of him. He also opposed the deal between Comcast Corp and NBC Universal, which he saw as responsible for the leak of a 2005 video in which he made derogatory comments about women.