2023-06-11 02:44:38 ET
Summary
- FIVG invests in companies involved in the development of 5G networking and its enabling technologies.
- The fund invests in 82 growth and value stocks, with over a quarter of its portfolio invested in the semiconductor space.
- The 5G market is projected to grow at a CAGR of 47.6% from 2023 to 2030.
5G represents the 5th generation of cellular networks, revolutionizing the way society, as a whole, connects with each other. It is up to 100 times faster than 4G and is creating opportunities for consumers and businesses that have never been possible before. While Big Tech may be dominating the technology sector right now, 5G's technological innovation should not be overlooked. FIVG is a leading ETF in the 5G industry, providing broad exposure to the sector and its enabling technology. I rate the fund a Buy as its applications are continuously expanding, especially in high growth industries. 5G industry projections also look very favorable for the long term.
Launched by ETF Series Solutions in 2019, Defiance 5G Next Gen Connectivity ETF ( FIVG ) invests in stocks of companies tied to the development of 5G networking and communications technologies. Companies within this portfolio range from a variety of sectors, including semiconductors, cellular networking and satellites, cellphone tower REITs, and hardware/software manufacturers. The fund invests in a total of 82 growth and value stocks operating across this sector, and it aims to track and replicate the performance of the Bluestar 5G Communications Index. Using a passive management approach, FIVG uses a market-cap weighting strategy to allocate its holdings.
Holding Analysis
FIVG invests in a myriad of countries globally, with a primary focus on the United States. The fund allocates over 85% of companies to the US and approximately 10% to countries in Europe. As for the top 10 holdings, the fund places far more emphasis on its top 4 holdings, all of which are semiconductor companies. Just in the top 4 holdings alone, semiconductors dominate over a quarter of the fund's entire portfolio, making its portfolio especially sensitive to changes in the semiconductor industry. Overall, the top 10 holdings constitute over 40% of the entire fund's portfolio.
Optimistic industry projections
With a long run outlook, the 5G market is expected to grow to nearly $200 billion by 2030, growing at a CAGR of 47.6% from 2023 to 2030. This optimistic projection is supported by the rollout of advanced applications, including Augmented Reality ((AR)), precision robots, and the Internet of Things (IoT). These applications are increasingly becoming integrated into our everyday lives, driving demand for high-speed, low-latency networks that 5G will provide. Furthermore, the 5G industry has also been bolstered by large investments in recent years. Overall, wireless network capital expenditures per capita in the US have grown by 12% each year since 2019. This significant growth in the industry may offer high growth potential for FIVG.
Since September 2020, FIVG has shown robust growth, with its total return soaring nearly 60% in just a year and a half. However, 2022 presented some challenges for the fund as a result of recessionary concerns and macroeconomic headwinds. Despite these challenges, the fund has shown resilience as it demonstrated a strong recovery since its low point at the end of 2022, reporting about 20% growth since then. With economic recovery gaining momentum and optimistic long-run projections for the 5G industry, I anticipate that this upward trend will continue.
Dividends
A significant drawback of this fund is its relatively low dividend yield. Overall, Seeking Alpha gives FIVG a dividend grade of C+. The fund currently has a dividend yield of 1.48%, which is significantly less than the median for all ETFs at 2.23%. What strikes me most is the fund's dividend growth rate in the last 12 months. Its dividend yield has decreased by 7.64%, which has been significantly less than the median dividend growth rate for all ETFs at 15.55%.
Looking at FIVG's performance since inception, it's interesting to note that the fund's dividend growth took an unexpected downturn at the beginning of 2022. This seems counterintuitive as the fund's total return experienced a significant decline during this time as well. Usually, investors would expect funds to increase their dividend yield to compensate for poor performance, but that does not seem to be the case for FIVG. In fact, since January 2022, the fund's dividends have been experiencing a continuous downtrend, with some degree of volatility.
Opportunities
There is a growing demand for 5G applications in a variety of industries, especially in the healthcare industry. Investopedia ranks the healthcare industry as the number one sector driving growth in the US economy. Alongside AI technology, the rollout and adoption of 5G has the potential to revolutionize the healthcare industry. Specifically, 5G will enable the development of advanced medical devices and applications, while also allowing doctors to provide patients with more accurate diagnoses and treatments. 5G in the healthcare industry was worth $215 million in 2021 and is projected to be worth over $3.6 billion by 2026, growing at a CAGR of 76.3% in that time frame.
Threats to semiconductors
As mentioned earlier, the fund invests over a quarter of its portfolio in semiconductor companies. While this sector is a pioneer in the rollout of 5G technology, the industry as a whole may be facing some challenges in the near future. With a deterioration in the global economy in 2022 and a decline in consumer demand, the semiconductor industry may still be negatively impacted in 2023. According to the latest forecast by Gartner, Inc., global semiconductor revenue is projected to decline by 11.2% in 2023. However, while the near term outlook for semiconductors does not look favorable, semiconductors will still grow by 18.5% in 2024. The industry also has a favorable outlook for the long term, as global chip demand is forecasted to increase 56% by 2030.
ETF quality opinion
I am ultimately quite bullish on FIVG and other 5G ETFs in the long run as the industry is projected to grow significantly in the next few years. Considering the fund's performance, I would also say that FIVG has been slightly underperforming, not quite meeting expectations aligned with favorable industry trends. However, with improving economic conditions, this fund has the opportunity to redeem itself and reestablish its potential.
ETF investment opinion
I rate FIVG a Buy. Though the fund has a low and declining dividend yield, this is not very uncommon among 5G ETFs, especially ones that are relatively new. The 5G industry presents considerable opportunities across consumer applications and leading industries, such as healthcare. While the semiconductor shortage seems to be the only real threat to this ETF, the sector is projected to rebound in 2024 and beyond. Some may argue that a Hold rating is more suitable, but I fail to see any immediate concerns significant enough to not buy FIVG right now.
For further details see:
FIVG: 5G Applications Are Everywhere, Benefiting Both Consumers And Businesses