The telecom industry is an odd hybrid of old line utility and fast paced wireless entrant. Now add to that mix multinational holding companies and you have an intriguing, beaten down industry that deserves a close look. ETFs cover the industry well not only in the US but also abroad.

Low-cost ETFs following major US indexes include Vanguard Telecommunication Services ETF (AMEX:VOX - News) at .25% annual expense ratio and iShares Dow Jones US Telecommunications Sector ETF (NYSEArca:IYZ - News) at .48% annual fees. In IYZ and VOX the top 10 firms make up over 2/3rds of assets. In VOX about 40% of assets are devoted to just two stocks, AT&T and Verizon. This is hardly broad diversification, but in the typical portfolio VOX will itself have a small allocation so there is no actual company risk concern.

Telecom showed steady improvement in early 2007, was trampled in late 2007 and then suffered the same fate in late 2008. In 2009 it recovered a bit of lost ground. The falls have been sharper than the rises:

some providers like S&P fold US telecom firms into the technology sector. Telecom is marginal in terms of size. As of November, telecom comprised a mere 2.6% of the total market, according to Dow Jones, with market capitalization of only $300 Billion.

But then there is Apple. Its iPhone is the most exciting and profitable innovation the cell phone market has seen for years. Apple, however, is not counted as telecom, nor should it be. It remains primarily a computer company. Such is the interplay between technology and telecom.

Trying to beat the major indexes by weighting with fundamental financial ratios, Invesco PowerShares Dynamic Telecommunications & Wireless Portfolio ETF (AMEX:PTE - News) costs a tad more at .60% annually. Also there is WisdomTree International Communications (NYSEArca:DGG - News) at .58%, which focuses on firms which pay regular dividends. This sector is dividend-rich so it aligns well with the DGG strategy.

No longer is telecom available at fire sale prices, although it remains well below average for US stocks in general. Price/Earnings ratios for US ETFs hovered between 13 and 14 as of October 2009. These are reasonable valuations for a sector which has potential for growth and innovation.

The primary opportunity for telecom is to expand from analog to digital services. Networking over twisted pair is a great way for legacy telephone companies to compensate for sagging analog voice service. And wireless companies are adding data services to 3G cell phones. Telecom companies have a billing relationship with millions of consumers, recognized brands and control of valuable infrastructure. They will be formidable competitors in the growing broadband arena.

The primary risk for telecom is that profitable long distance revenue will crumble once free or cheap Voice over Internet is widely adopted (ala Skype). Innovation, especially when it involves the Internet, is not to be confused with profitability.

Probably the most exciting play in telecom is international. Multinationals are scrambling to snap up local players in all sorts of markets. ETFs gaining such exposure include iShares S&P Global Telecommunications Sector ETF (NYSEArca:IXP - News) and SPDR S&P International Telecommunications Sector ETF (AMEX:IST - News). They are moderately priced at .48% and .50% annual fees. Their returns vary considerably from their US ETF counterparts, reflecting the high degree of regulation abroad and diverging fortunes of differetent economies. Unfortunately, investors hoping to get telecom exposure in emerging markets will be disappointed. Most allocation of assets is still towards developed economies.

Finally, there are two leveraged ETFs: ProShares Ultra Telecommunications ETF (AMEX:LTL - News) gives double daily long exposure and ProShares UltraShort Telecommunications ETF (NYSEArca:TLL - News) gives double daily short exposure. The daily return exposure adds a bit of leverage over standard long or short margin plays. The .95% annual fees are actually a bargain. ETFZone has found leveraged ETFs to provide more leverage per unit of cost than borrowing on margin from brokers when the various costs are compared (management fees plus rolling futures contracts vs. transaction costs and margin interest). Both ETFs are strictly for experienced traders with short term plays.

Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.