Investor that have paid even just cursory attention to the communication services sector, telecom stocks and the related exchange-traded funds (ETFs) this year have likely heard something about the rollout of 5G communication systems.
For investors, 5G, or fifth generation cellular communications technology, has myriad implications and presents an array of opportunities. One way of learning more about 5G and the related opportunities, including ETFs, is to understand what 5G is not comparable to.
Think back to when the first iPhone debuted. The easiest way of tapping that market, at least initially, was via Apple Inc. (NASDAQ:AAPL) shares or AT&T (NYSE:T) because the latter had exclusive rights to the iPhone for a few years.
While 5G does not debut in earnest until next year, some telecom companies, including Dow Jones Industrial Average component Verizon Inc. (NYSE:VZ), are testing it in select locales this year. Moreover there are a slew of funds that deserve consideration as “5G ETFs” that extend beyond traditional telecom offerings.
Here are some of the more interesting names among 5G ETFs to consider right now.
Defiance Next Gen Connectivity ETF (FIVG)
Expense ratio: 0.30% per year, or $30 on a $10,000 investment
Among 5G ETFs, the Defiance Next Gen Connectivity ETF (NYSEARCA:FIVG) is the original and, to its credit, one of this year’s most successful new ETFs. FIVG is just over three months and already flirting with $90 million in assets under management. That is an impressive start for a thematic fund.
What makes FIVG a credible 5G ETF, beyond its highly appropriate ticker, is its depth of reach. Meaning, this 5G ETF has more industry exposure than many traditional telecom funds, positioning FIVG to take advantage of multiple sub-themes in the 5G arena.
Components in this 5G ETF “are part of the following categories: core carrier grade networking equipment including cellular antennas and routers, mobile network operators, satellite-based communications, enhanced mobile broadband chips, new radio technology, wireless network test and optimization equipment, cloud computing equipment, software defined networking or network functions virtualization, fiber optic cables, or cell tower and/or data center real estate investment trust,” according to Defiance ETFs.
For thematic investors, FIVG is has another nice feature: a really low fee compared to highly focused ETFs addressing other fast-growing themes.
First Trust Indxx NextG ETF (NXTG)
Expense ratio: 0.70%
The First Trust Indxx NextG ETF (NASDAQ:NXTG) is something of a redemption story among 5G ETFs. For more than eight years, NXTG toiled in relative anonymity as a smartphone ETF. Just a few weeks ago, First Trust converted NXTG to a 5G ETF and seemingly out of nowhere, it now has more than $130 million in assets under management.
NXTG holds 97 stocks from 10 industry groups, giving it a deeper bench than rival FIVG in terms of number of holdings. The First Trust allocates almost a quarter of its weight to semiconductor stocks and features more exposure to traditional telecom fare than does the competing FIVG, so investors should expect these 5G ETFs to deliver the same returns.
What will be interesting about this competition is if NXTG can deliver returns that are in excess enough of FIVG’s for the former to merit its 0.70% fee. In the world of ETFs, it is rare for two similar funds to have this wide of a fee gap, particularly in the thematic space.
VanEck Vectors Video Gaming and eSports ETF (ESPO)
Expense ratio: 0.55%
One of the interesting things about the current generation of thematic ETFs is how many of the underlying themes intersect with each other. Believe it or not, that sentiment applies to video game funds, such as the VanEck Vectors Video Gaming and eSports ETF (NYSEARCA:ESPO) and 5G.
“The gaming industry in particular should benefit from the new opportunities that 5G presents,” said IHS Markit in a recent note. “Because online gaming requires low latency and fast speeds for an optimal user experience, 5G will deliver a vastly improved gaming experience. IHS Markit predicts that revenue from mobile gaming will jump to $83 billion in the next five years. Moreover, cloud gaming will also benefit since 5G removes the need for high-cost hardware.”
One of the driving forces of the gaming industry over the next several years is expected to be mobile gaming and that is where 5G has potentially significant applications.
“5G will offer countless opportunities for improved streaming experiences, thanks to faster speeds, lower latency, stronger reliability, higher capacity, and better mobility,” according to IHS Markit. “Given such vast improvements, IHS Markit predicts that there will be 1 billion 5G mobile subscriptions by 2023.”
Global X Internet of Things ETF (SNSR)
Expense ratio: 0.68%
Internet of Things (IoT) is the epitome of a sprawling opportunity set where 5G has vast potential. In fact, the Global X Internet of Things ETF (NASDAQ:SNSR) is the only dedicated IoT ETF, but is very much a 5G ETF, too. SNSR, which debuted in September 2016, tracks the Indxx Global Internet of Things Thematic Index.
Like several of the other 5G ETFs highlighted here, SNSR is heavy on semiconductor stocks (over 30% of the fund’s weight), but it also has expansive industry reach with exposure to about 10 other groups, including some healthcare exposure. Some of SNSR’s holdings include familiar names, such as Cisco Systems Inc. (NASDAQ:CSCO), a company that is going to be a major 5G player.
“Further, the rapid transition to the 5G next generation mobile standard has led Cisco CEO, Chuck Robbins, to state that the company is singularly focused on winning the 5G race,” according to Global X research. “Global internet traffic continues to multiply, highlighted by an explosion of data. By 2022, more data will be consumed than in all previous years combined, as superfast 5G becomes more ubiquitous. Consequently, as the number of devices connected to networks grows, Cisco’s products will play an ever-growing role in powering the IoT theme.”
Communication Services Select Sector SPDR (XLC)
Expense ratio: 0.13%
The Communication Services Select Sector SPDR (NYSEARCA:XLC) is the largest ETF tracking the communication services. That used to be the telecom sector and while XLC is home to the likes of Facebook Inc. (NASDAQ:FB) and Alphabet Inc. (NASDAQ:GOOG NASDAQ:GOOGL), it is also features legacy telecom companies and is a relevant 5G ETF.
XLC’s mix of old guard telecom with more cutting edge technology purveyors is notable because that combination will be needed for 5G to succeed.
“The fifth-generation mobile standard known as 5G will not only bring significant benefits like much faster data speeds and increased connectivity, it will also be the first all-inclusive cellular network able to accommodate three distinct types of use cases, ranging from very basic to the cutting edge,” according to IHS Markit. “Many of these use cases operated historically on different networks, creating challenges in achieving economies of scale.”
XLC is home to the likes of AT&T and Verizon, too, which data confirm is a relevant trait.
“The projected installed base of 5G in its first five years of launch will be much larger than that of 4G over the same time,” said IHS Markit. “By 2023 or Year 5, subscribers to 5G will reach 1.3 billion, up substantially from a low starting base in 2019, the first year of 5G rollouts.”
Global X MSCI China Communication Services ETF (CHIC)
Expense ratio: 0.65%
The Global X MSCI China Communication Services ETF (NYSEARCA:CHIC) is the China answer to the aforementioned XLC and it is a relevant 5G ETF as well. As is the case with almost everything involving China and the U.S., there is expected to be fierce 5G competition between the world’s two largest economies. That competition is starting imminently as China Mobile, CHIC’s largest holding is expected to rollout its 5G platform in the coming days.
In addition to China Mobile, several other CHIC components have already landed coveted 5G contracts in China and some members of this fund will be building 5G networks in other developing economies. 5G could be another sticking point in the already fragile relationship between the U.S. and China.
“The U.S. military’s Defense Innovation Board (DIB) warned Congress that China’s fifth generation telecommunications design will directly interfere with U.S. weapons systems,” reports the Epoch Times.
SPDR S&P Telecom ETF (XTL)
Expense ratio: 0.35%
The SPDR S&P Telecom ETF (NYSEARCA:XTL) is one of the purer telecom ETFs on the market, making it a legitimate 5G ETF as well. XTL, which is over eight years old, provides exposure to the following groups: Alternative Carriers, Communications Equipment, Integrated Telecommunication Services, and Wireless Telecommunication Services, according to the issuer.
XTL’s 42 holdings are equally weighted and the 5G funds allocates nearly 58% to makers of communications gear. Alternative and traditional wireless communications carriers combine for almost a third of the fund’s weight.
While XTL may be one of the more overlooked 5G ETFs, the demands the new communications system is putting on equipment providers has the potential to make XTL one of the biggest beneficiaries of this new telecom theme.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.