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.