Fifth-generation wireless networking (5G) has been hyped as the transformational technology that will deliver a hyper-connected future with uber-fast download speeds.
Canada has done well in creating the telecom backbone for 5G with the trio of major providers ending 2021 with 70-per-cent coverage, close to the level of U.S. penetration, according to the wireless trade association 5G Americas.
The group says global wireless 5G adoption is now in “the rapid acceleration phase,” having exceeded a half-billion connections by the end of 2021 and forecasting it will reach 1.3 billion by the end of this year.
For Canadians using exchange-traded funds (ETFs), investing in 5G can be tricky; currently, there are no “pure-play” 5G funds listed in Canada, although they do exist in the U.S.
It should not be considered a deal-breaker, however, given the massive rollout will include many technology and infrastructure companies not currently considered to be 5G focused.
As well, investors might consider 5G as a foundational technology that will benefit a swath of industries, which is how many Canadian fund providers are creating funds.
“Data is really our most precious asset,” says Kaitlin Thompson, vice-president of product strategy with Evolve ETFs of Toronto.
The company has taken a data-centric approach with its Evolve Innovation Index ETF (EDGE-T) which offers coverage in eight key sectors such as cybersecurity and cloud computing as well as 5G. Some of its 5G holdings include Qualcomm, T-Mobile US Inc. and Vodafone Group Plc.
She notes that 5G has been the best performing component of the index fund recently and it comprises the largest weighting based on its performance.
EDGE has a management expense ratio (MER) of 0.33 per cent and has $89.5-million in assets. The ETF has lost 18.25 per cent year to date, dragged down by the broader tech selloff. Of the eight sectors in EDGE, the 5G component fell the least. (Data based on Morningstar as of May 5).
For investors seeking even greater exposure to international 5G growth, they might consider a fund such as the BMO Global Communication ETF (COMM-T) which charges 0.40 per cent and has $21.7-million in assets. The fund has decreased by about 14 per cent so far this year.
Within COMM, the weighting to 5G is between 20 to 30 per cent, says BMO portfolio manager Alfred Lee in Toronto. The fund also holds telecom companies such as T-Mobile and Verizon Communications.
“Even though some of the companies are not pure 5G plays, everything is going to be interrelated,” he says, with tech companies and infrastructure providers all contributing to the build out along with telecom giants.
Another fund that offers indirect exposure to 5G is the Horizons Industry 4.0 Index ETF (FOUR-T), which charges 0.54 per cent and has $13.9-million in assets. It lost 27.2 per cent so far in 2022.
FOUR focused on different technologies such as the Internet of Things, which involves connected devices and objects that use network-enabled sensors, chips and processors to interact with other devices on a network, including 5G.
“The Internet of Things is very much a great growth area,” says Hans Albrecht, a portfolio manager with Toronto-based Horizons. “By some estimates, we are going to be building two billion devices over the next 10 to 15 years. As 5G starts to [dominate] you just naturally become part of that because these devices start to incorporate that technology.”
U.S. markets offer investors a handful of pure-play 5G ETFs. The oldest is the Defiance 5G Next Gen Connectivity ETF (FIVG-A) which charges 0.30 per cent and has US$1-billion in assets. FIVG has lost nearly 15 per cent so far this year.
Another option is the First Trust IndXX Next G ETF (NXTG-Q) which carries a “pricey” 0.70 per cent management fee, notes Neena Misha, research director with Zacks Investment Research in Chicago. NXTG has fallen by nearly 13 per cent year to date.
The first actively managed 5G fund was the Esoterica NextG Economy ETF (WUGI-A) which charges 0.75 per cent and has US$28.3-million in assets. It has dropped by about 29 per cent year to date.
WUGI focuses on “firms anticipated to benefit the most from the adoption of 5G technology,” states Esoterica Capital, namely producers of the 5G technologies and their end-users such as e-commerce companies.
“WUGI has slightly outperformed the other two since its inception (March 2020) but if you look at the performance this year, WUGI has been beaten down a lot,” says Ms. Misha.
Of the three, FIVG offers the greatest exposure to the U.S. market (89 per cent) with WUGI at 76 per cent. First Trust’s NXTG is a true international fund with just 39 per cent of its holdings in the U.S.