FTLS: Reaffirming My Buy Recommendation

The First Trust Long/Short Equity ETF (FTLS) remains a compelling investment opportunity in 2025, particularly for those seeking exposure to the fragmented telecom services sector. While the fund's direct telecom holdings remain opaque due to its actively managed structure, the broader industry trends and FTLS's strategic positioning suggest a strong case for undervaluation and long-term growth.

Strategic Undervaluation in the Telecom Sector

The U.S. telecom sector is currently trading at a P/E ratio of 26.0x, below its 3-year average of 29.7x, and a P/B ratio of 1.62x, significantly lower than the Information Technology sector's 13.09x, according to Simply Wall St's analysis. This valuation gap reflects investor caution amid challenges like commoditization of core services, high capital expenditures, and margin pressures. However, these metrics overlook the sector's transformative potential.

Telecom companies are pivoting toward AI-driven network optimization, 6G R&D, and B2B vertical solutions (e.g., private 5G, IoT, and cybersecurity). For instance, AT&T's generative AI platform reduces software development time by 40%, while T-Mobile's focus on affordable 5G pricing has driven subscriber growth, according to Deloitte's 2025 outlook. These innovations are reshaping the sector's value proposition, yet valuations remain anchored to legacy metrics.

FTLS's Positioning in a Fragmented Market

FTLS's long/short equity strategy allows it to capitalize on the telecom sector's fragmentation. With a 66% net long exposure and a diversified portfolio of 344 assets, the fund's 5.63% allocation to Communication Services suggests indirect exposure to telecom megatrends, per the StockAnalysis holdings. While specific holdings are not disclosed, the fund's top 10 holdings (accounting for 63% of assets) include tech giants like Apple and Microsoft, which benefit from telecom-driven demand for cloud infrastructure and AI tools, according to the FT Portfolios holdings.

The fund's risk-adjusted returns-Sharpe ratio of 0.48 and Sortino ratio of 0.75-indicate moderate volatility compared to the S&P 500, according to PortfoliosLab. Additionally, FTLS's active management allows it to hedge against telecom sector headwinds by shorting overvalued or underperforming stocks, a strategy that could enhance returns as the sector consolidates through M&A.

Long-Term Growth Catalysts

The telecom sector is on the cusp of a renaissance. M&A activity has surged in 2025, with deals like Charter Communications' $34.5 billion acquisition of Cox Communications and SES's $3.1 billion purchase of Intelsat signaling a shift toward scale and infrastructure dominance, according to the TeckNexus tracker. These consolidations are likely to drive efficiency gains and unlock value for investors.

Moreover, the sector's focus on AI and 6G is creating new revenue streams. For example, AI-powered network operations centers are reducing downtime by 30%, while satellite-based connectivity is expanding into remote markets, per IDC Europe. These advancements position telecoms to transition from commodity providers to technology enablers-a shift that could justify higher valuations over time.

Why FTLS Stands Out

FTLS's active long/short strategy is uniquely suited to navigate the telecom sector's volatility. By leveraging quantitative analysis and proprietary models, the fund identifies high-quality earnings growth in long positions (e.g., AI-driven telecom infrastructure) while shorting weaker performers (e.g., legacy telcos with declining margins), according to the FT Portfolios summary. This dual approach mitigates downside risk while capturing upside from the sector's innovation wave.

The fund's 1.60% expense ratio is above average for ETFs, but its 4-star rating over 3- and 10-year periods, per the FT Portfolios summary, underscores its ability to deliver risk-adjusted returns. For investors seeking exposure to telecom's long-term potential without direct stock picking, FTLS offers a diversified, actively managed alternative.

Conclusion

The telecom sector's undervaluation is a temporary dislocation, not a permanent condition. As companies pivot toward AI, 6G, and B2B solutions, the sector's fundamentals are strengthening. FTLS, with its strategic long/short positioning and diversified portfolio, is well-placed to benefit from this transformation. For investors with a 5–10 year horizon, FTLS remains a buy recommendation-offering a unique blend of defensive positioning and growth potential in a sector poised for reinvention.