Fifth-generation, or 5G wireless technology is coming soon and is being touted as the greatest thing since, well, 4G technology, and the Defiance Next Gen Connectivity ETF (FIVG) that launched Tuesday is being touted as the first exchange-traded fund created specifically to invest in this space. Its portfolio runs the gamut from mobile network operators and chipmakers to cell phone towers and satellite communications.
“We wanted to make sure we had a portfolio that encompasses all that’s going into 5G,” says Paul Dellaquila, global head of ETFs at Defiance ETFs. “Our thinking is that 5G will be a transformative technology, and some people have compared it to the printing press or electricity, so we think we’re in this at the right time.”
That’s a heavy statement, but 5G proponents say it will deliver speeds that are roughly 20 times faster and with lower latency than what’s currently available with 4G technology. This promises to enable the Internet of Things to be more of a thing, propel autonomous vehicles to wider use, lead to advances in medicine and health care, and make commerce more efficient on the whole.
Nonetheless, the 5G rollout won’t happen overnight. In baseball parlance, the 5G movement is “still in batting practice,” Dellaquila says. “We’ll start seeing the phones this year, but it will take a couple of years to transition to a full capability because the way that 5G waves and signals travel are a little bit different from how it works for 4G, so more towers will need to be built out."
The FIVG fund’s underlying BlueStar 5G Communications Index is a modified market capitalization-weighted portfolio composed of roughly 60 global companies that are expected to meaningfully contribute to a 5G world. The U.S. is the largest country weight at roughly 78 percent, followed by Finland and Sweden at 5 percent each.
The overseas companies are limited to American depositary receipts, which Dellaquila says are cheaper to trade versus trading in their home countries. And lower costs means lower fund expenses. “We wanted to offer the fund with an attractive price point,” he says.
FIVG trades at an expense ratio of 0.30 percent.
China, which is a major player in 5G technology, is largely absent from the fund's index save for China Mobile Ltd. But that has to do with market listings and not with the political kerfuffle involving the Trump administration's threat to ban Chinese telecom equipment makers Huawei Technologies Co. and ZTE Corp. from participating in the 5G infrastructure build out in the U.S. From an investment standpoint, Huawei is privately held and ZTE trades in the U.S. on the over-the-counter pink-sheets market, which makes it ineligible for inclusion in the index.
Four Segments
Companies within the index are categorized in four segments. The first group (50 percent weighting at the twice-yearly rebalancing) includes makers of core equipment such as routers and antennas, along with providers of satellite communications technology in the C-band wireless spectrum that’s compatible with 5G networks.
The second-largest segment (25 percent weight) consists of cellphone tower or data center real estate investment trusts, mobile network operators that will roll out 5G in their respective markets, and cloud computing equipment companies.