After years of promise but little concrete action, the “5G” transition in mobile communications is finally underway.
All four major mobile carriers have already begun to roll out the next-gen data network, which is designed to vastly increase speeds and functionality for devices such as cellphones and tablets. Consumers can also now purchase 5G-enabled smartphones, with greater availability expected in 2020 (such as in the newly announced next-gen iPhones).
Given that, it's no surprise that the two pure-play 5G ETFs on the market have seen such strong inflows this summer. Investors love a hot trend, and they love piling in just as the getting gets good.
But despite the relatively narrow theme, the two 5G funds aren't interchangeable: A quick peek under the hood of each reveals two vastly different approaches to the same emerging industry.
Big Flows Into 5G ETFs
On Friday, the Defiance Next Gen Connectivity ETF (FIVG) took in $3.8 million in new net inflows, nudging the fund over the $100 million mark. FIVG, which now has $100 million in assets under management, is the largest of Defiance's three-ETF suite.
That comes just weeks after similarly huge flows into FIVG's main competitor. In late May, the First Trust Indxx NextG ETF (NXTG) switched indexes from a benchmark tracking smartphone equities to one tracking specifically 5G network infrastructure and service providers. The money followed shortly thereafter; in mid-June, NXTG took in bulk inflows of $108 million over two days—easily its best two-day period ever.
Both are relatively new funds; FIVG launched in March, while NXTG, though first incepted in 2011, has only tracked 5G companies since May. As a result, it's difficult to meaningfully compare the performance of the two. Still, over a 30-day period, FIVG has come out slightly ahead, returning 6.6% versus NXTG's 5.3%:
Source: StockCharts.com; data as of July 30, 2019
Narrow vs. Broad
FIVG's slight edge over NXTG probably has to do with its crunchier, more specific take on the underlying 5G theme.
FIVG weights global 5G stocks according to four tiers based on the technology developed or support by the company in question.
The majority (50%) of its portfolio is allocated to core equipment manufacturers developing the routers and satellites that make 5G networking possible. The second tier (25%) focuses on REITs operating cell towers and data centers, as well as mobile network providers and cloud computing companies working in support. Another 15% of the portfolio focuses on quality testing and optimization firms, while the final tier (10%) focuses on next-gen modems and fiber cable companies delivering 5G capability to the end user.
Meanwhile, NXTG adopts a broader approach. First it ranks potential holdings by market cap, teasing out the 100 largest. Then it allocates holdings across two subthemes: infrastructure and hardware, which comprise 80% of the portfolio; and telecommunication service providers, which comprise the other 20%.
Within those buckets, stocks are equally weighted.
Differences In Top Holdings
5G is still an emerging industry, so given the narrowness of the theme, it's not surprising that there's some commonality in holdings between FIVG and NXTG—32 names, as of July 30.
However, in terms of weighting, only 29% of the ETFs' holdings actually overlap. That's largely because of how stocks are assigned individual tiers within each fund, meaning that what might be a significant holding in one ETF has a reduced weighting in the other, or maybe doesn't appear at all:
|Top 10 Holdings In 5G ETFs|
|Skyworks Solutions, Inc.||5.49%||Win Semiconductors Corp.||2.13%|
|Analog Devices, Inc.||5.39%||Micron Technology, Inc.||2.09%|
|Marvell Technology Group Ltd.||5.17%||Lumentum Holdings, Inc.||1.86%|
|Nokia Oyj Sponsored ADR||5.12%||Semtech Corporation||1.82%|
|Xilinx, Inc.||5.05%||Skyworks Solutions, Inc.||1.76%|
|Telefonaktiebolaget LM Ericsson Sponsored ADR Class B||4.33%||Qorvo, Inc.||1.76%|
|AT&T Inc.||3.00%||STMicroelectronics NV||1.72%|
|Keysight Technologies Inc||2.91%||Infineon Technologies AG||1.69%|
|Verizon Communications Inc.||2.83%||Fujitsu Limited||1.69%|
|Cisco Systems, Inc.||2.80%||Viavi Solutions Inc||1.68%|
Source: ETF.com; data as of July 30, 2019
For example, chip manufacturer Skyworks Solutions (SWKS) is the top holding in FIVG, at 5.4%, but it only makes up 1.7% of NXTG. Analog Devices (ADI), FIVG's second biggest holding, doesn't even show up in NXTG. Its third largest holding, Nokia at 5.2%, comprises 1.7% of NXTG.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Meanwhile, Win Semiconductors, Micron Technology and Lumentum Holdings, NXTG's top three stocks, don't appear in FIVG at all.
Furthermore, although these three stocks are all strong performers year to date, their ability to drive NXTG is hampered because they make up such small slices (2% each) of the ETF's overall portfolio. NXTG's tiered, equal-weighting scheme ends up diluting the impact from any one particular stock.
Story Remains The Same
This is a story we've seen many times before. Plenty of hot themes—especially in tech—have ended up with two major funds duking it out for primacy and assets: There are two main cybersecurity ETFs (the $1.6 billion ETFMG Prime Cyber Security ETF (HACK) and the $1 billion First Trust NASDAQ Cybersecurity ETF (CIBR)); two main robotics ETFs (the $1.3 billion ROBO Global Robotics and Automation Index ETF (ROBO) and the $1.5 billion Global X Robotics & Artificial Intelligence ETF (BOTZ)—and now there's FIVG and NXTG.
Each ETF has carved out its niche: FIVG takes the super-crunchy specialist's approach to 5G, while NXTG offers a broader, more comprehensive play. Judging from the flows, both ETFs are finding some success with investors.
And that's OK—there's not always a right or wrong take on a theme, just whichever one is right or wrong for the individual investor.
Contact Lara Crigger at [email protected]