InvestorPlace’s Vince Martin recently suggested Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) might be the best 5G play. While I admire my colleague’s chutzpah, I’m in the business of providing readers with potential options, those that minimize the inherent risk of betting on Ericsson stock and other turnaround candidates.
Ericsson, much like its Scandinavian counterpart, Nokia (NYSE:NOK), hasn’t performed very well over the past five years, generating an annualized total return of -5.6%. While 290 basis points better than Nokia, that’s still an awful return on investment when you consider the U.S. markets as a whole gained 10% over the same period.
The opportunity cost of owning these telecom stocks is still too high, regardless of what their valuations might suggest.
“ERIC is trading at less than 15x free cash flow based on 2019 numbers. If margins expand and sales grow, that multiple either has to dip into the single-digits or, as would be more likely, ERIC stock has to rally,” Martin wrote February 11.
I recommend you read his article. Vince’s argument makes perfect sense.
However, to my mind, Ericsson is, first and foremost, a stock for professional money managers who have diversified portfolios to protect against the inhernet risk presented by turnaround stocks.
While every stock has risk, to bet more than the tiniest amount of your retirement portfolio on it would be a mistake.
For me, the best 5G play is not a stock, but rather one of these two ETFs.
An Inexpensive Way to Play Ericsson Stock
The biggest ETF provider doesn’t operate the Defiance Next Gen Connectivity ETF (NYSEARCA:FIVG) in the world — Defiance ETFs LLC have just three thematic fund offerings — but it does give investors interested in capturing potential gains made by Ericsson in the 5G arena a low-cost way to do so.
It charges just 0.3% and generates a 30-day SEC yield of 1.5%. Not bad for a bunch of stocks trying to chase the next significant secular trend in technology.
As for Ericsson, FIVG has it weighted at 4.54%, making it the fifth-largest holding. Interestingly, Nokia is the top holding at 5.74%. My colleague isn’t nearly as positive about Nokia as he is Ericsson. If you feel the same way, this could be a deal-breaker. Of the 75 holdings in the portfolio, the top 10 account for 40% of the $251.6 million in total net assets.
If You Need a Bigger ETF Provider
First Trust is one of my favorite ETF providers. Last October, I recommended the First Trust Indxx NextG ETF (NASDAQ:NXTG) as a possible alternative to Qualcomm (NASDAQ:QCOM).
“In June, MarketWatch discussed how the powers that be at First Trust cast aside the ETF’s former smartphone focus to bet on 5G. According to the article, NXTG, which debuted on May 29, managed to gain $110 million in new assets in the first three weeks of its conversion from the First Trust Nasdaq Smartphone Index Fund,” I wrote October 22.
Today, NXTG has $328.5 million in total net assets, about 28% more than FIVG. A lead it’s taken despite having a management expense ratio of 0.7%, more than double Defiance’s ETF, and having pivoted to 5G a month or two after FIVG’s launch.
Furthermore, NXTG allocates 80% of its portfolio to 5G infrastructure and hardware, while the remaining 20% is allocated to telecommunications providers. All of the stocks within the two segments are equally weighting.
My guess is Vince would likely prefer this ETF over FIVG as Ericsson has a current weighting of 1.34%, just 34 basis points less than Nokia, which has the largest current weighting due to its performance, so far in 2020.
The Bottom Line
I may be wrong about Ericsson and it will turn out to be one of the best performers of the 2020s. If that’s the case, I apologize in advance for persuading you to take the safer bet.
However, I doubt I will be wrong. If 5G turns out to be as big as everyone is saying it’s going to be, both FIVG and NXTG will be long-term home runs.
I can sleep at night providing this kind of advice. I guess we’ll see how it turns out.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
