The fifth generation (5G) of wireless mobile networks promises to bring technologies once thought to be the domain of science fiction – from self-driving cars to remote surgeries conducted thousands of kilometres away – to reality. But for investors, 5G could be the opportunity of a generation.
“As 5G rolls out and gets implemented globally, fibre-optic cable manufacturers, hardware providers, telecommunications firms, software providers and others that will build the infrastructure for this new standard will benefit,” says Raj Lala, president and chief executive at Toronto-based Evolve Funds Group Inc.
5G, currently in the initial stages of being rolled out across the developed world, is hundreds of times faster than the existing fourth generation (4G) long-term evolution (LTE) wireless networks and could have profound implications – especially for functions that use robotics and demand precision.
“[5G wireless networks] will support an entirely new range of services we simply couldn’t have even dreamed of using existing technology,” says Carmi Levy, an independent technology analyst in London, Ont. “If you’re a surgeon doing remote surgery, the lag with 4G LTE can be fatal.”
A more common 5G application will be to provide greater speed and efficiency for functions such as self-driving vehicles, which are already well into the development stage.
“As you approach an intersection, an autonomous vehicle is networking with all of the cars around it and with the traffic lights,” he says. “The sidewalks even have embedded sensors.”
Some of the biggest telecom-equipment makers are investing billions of dollars jockeying for their piece of the 5G pie. One of the most influential players is China-based Huawei Technologies Co. Ltd., which is currently embroiled in a political dispute for allegedly using its wireless networking technology to spy on adversaries.
“There have been accusations that Huawei is in the pocket of China’s government, that Huawei equipment has back doors built into it that allows data to be shared with government officials. Huawei, of course, denies these accusations, but they’re still remain out there,” Mr. Levy says.
Peter Hofstra, senior portfolio manager and head of research at Toronto-based Harbour Advisors, a division of CI Investments Inc., is positioning the company’s technology portfolios to focus on 5G. He’s been investing in technology for more than 25 years and says that while snags such as the Huawei situation could delay the roll out of 5G, it’s an inevitability.
“You have to believe in the growth, but I would be a little skeptical on the timing of that growth,” he says. “New technologies always take longer to roll out than people expect, so there can be some money lost by investors early on.”
Other telecom-equipment makers such as Nokia Corp. (NOK-N) and Cisco Systems Inc. (CSCO-Q) are also in the race to roll out 5G, but Mr. Hofstra is putting his money on Qualcomm Inc. (QCOM-Q) to lead the charge.
“[Qualcomm is] the de facto leader in communications platforms. Anyone looking at this space would want Qualcomm on their list,” Mr. Hofstra says.
In addition to telecom equipment makers, he also expects wireless service providers such as AT&T Inc. (T-N) and Verizon Communications Inc. (VZ-N) in the United States to gain from 5G, along with device makers such as Ericsson (ERIC-Q) and Apple Inc. (AAPL-Q).
“It’s probably good for the handset providers, ultimately,” he says. “There are additional services that add to the utility of all your mobile devices.”
Technology stocks are already trading at record highs, which makes finding bargains difficult. However, Mr. Hofstra says investors might have to pay up for the key players in 5G – and keep in mind that they’re long-term investments.
“No [company] in technology that is decent is giving you a fantastic entry point today,” he notes.
Mr. Hofstra is less optimistic about Canada’s wireless service providers such as BCE Inc. (BCE-T) and Rogers Communications Inc. (RCI-N) because 5G will override the need for hard wires like fibre and cable, which are core to their business models.
“Bell and Rogers have other legacy stuff that they are constantly trying to offset, so it’s hard to picture them as pure 5G plays,” he says.
Choosing the companies that will benefit most from 5G calls for experienced money managers who have a background investing in technology. Most investors can only get that expertise through mutual funds, which usually impose annual management fees topping 2 per cent of the amount invested. As a lower-cost alternative, Evolve Funds recently included a 5G technology component to Evolve Innovation Index Fund (EDGE-T), an exchange-traded fund (ETF) with an annual management fee of 0.4 per cent.
The ETF tracks 10 companies identified as leaders in the development of 5G technology in the Solactive Global Innovation Index.
“Our 5G portfolio consists primarily of global telecom companies that are providing, or are going to provide, the necessary infrastructure as well as the hardware manufacturers building the products we will be using on the much faster network,” Mr. Lala says.
The top 5G-related holdings in Evolve Innovation Index Fund include China Mobile Ltd. (CHL-N), Deutsche Telekom AG (DTEGF), Samsung Electronics Co. Ltd., SoftBank Group Corp. (SFTBY), T-Mobile US Inc. (TMUS-Q), Verizon and Qualcomm.
Unlike actively managed funds, Evolve Innovation Index Fund automatically adjusts holdings and weightings reflected in the underlying index. Mr. Lala says that a passive ETF that casts a wide net is the best way to profit from 5G.
“I don’t think there are a lot of [portfolio] managers out there who understand these spaces because many of them are relatively new,” he says. “You never really know who is going to get a foothold in a specific business line. Trying to guess and manage [that] doesn’t really make a ton of sense.”