2023-03-22 11:04:18 ET
Summary
- FIVG offers investors convenient access to companies that are expected to benefit from the growth of the 5G industry.
- With faster speeds, lower latency, and higher bandwidth, 5G technology has the potential to revolutionize multiple industries, including healthcare, transportation, and manufacturing.
- I rate FIVG as a Hold. Strong long-term demand trends are enough to address my short-term concerns about the rollout of 5G.
by Kemerey Black
Technology has been a top-performing sector in the past, thanks to high demand for tech products and services and the availability of capital supported by low interest rates. However, recent layoffs and tightening financial conditions have affected the sector's performance. Telecommunications is an industry subset of that broader tech sector, and companies involved in the 5G business are a further subdivision within that industry. 5G is the fifth-generation mobile network, which features faster speeds and much less lag time when using devices, versus 4G. Despite the challenges facing the broader tech sector, I see a potential opportunity in Defiance Next Gen Connectivity ETF ( FIVG ), a rare ETF that focuses on this sub-industry of the tech sector.
5G applications are expected to transform the way we work and live. FIVG is the first 5G ETF. This latest generation of computing power, driven by network connectivity, connects the physical with the digital in a superior way than in the past. Lower latency and faster speeds do not only benefit consumers and their smartphones. 5G reaches well beyond smartphones to the Internet of Things ((IOT)) and has meaningful opportunities for almost every industry (including healthcare, transportation, manufacturing, and education). The IoT is the vast network of connected devices with the ability to transfer data without requiring human interaction.
On the back of rising interest rates, which have a greater impact on growth-oriented equities, this ETF underperformed last year. It is possible that interest rates may not peak until sometime next year, which could continue to act as a headwind. Additionally, the rollout of 5G is not without its challenges, with supply chain disruptions at the top of the list. However, I believe growth in the sector is enough to offset these challenges and rate FIVG as a Hold.
Strategy
FIVG invests in US and non-US stocks (though all are US-listed) that are instrumental in the rollout of 5G. The ETF is invested in roughly 90 stocks in businesses from radio access network tech, mobile network operators, semiconductors, and cloud computing equipment, to network visualization, cell tower and data center REITs, 5G-enabled device chips, and fiber optic cables. So, there is a lot more diversification amongst traditional sectors here, as 5G is a technology, not a single sector.
Holding Analysis
Companies included in FIVG's portfolio are well-positioned to benefit from the eventual widespread adoption of 5G technology, as it becomes more accessible and affordable for consumers and businesses alike. While the 5G rollout may be challenged, the long-term potential for growth in the 5G industry makes FIVG a compelling investment opportunity for those with the patience to endure the inevitable volatility along the way.
The top ten holdings comprise around 40% of FIVG’s assets. That means 80 stocks make up the other 60% of the fund. That lopsided allocation is something I prefer, especially in an ETF that is narrowly focused to begin with. FIVG’s primary exposure is to the technology sector, which makes up more than two-thirds of its allocation, followed by a 20% allocation to the communication services sector. The real estate sector occupies 9% of the ETF’s allocation. So, this is clearly a tech-telecom investment vehicle.
Strengths
The ETF provides access to companies with high growth potential diversified across the 5G opportunity set. The 5G market is expected to grow at a CAGR of over 50% to reach an estimated value of $3.8 billion by 2032. Companies included in FIVG are expected to play a critical role in the 5G rollout, providing investors with exposure to the firms that are driving the development, deployment, and implementation of this revolutionary technology.
Weaknesses
One of the greatest weaknesses of the 5G rollout is time. Overhauling infrastructure to facilitate 5G takes time, and the rollout may take longer than expected. Unlike 4G, which can cover large areas with fewer transmitters, 5G requires more transmitters to cover the same area, which adds to the time and expense of the rollout. Furthermore, while the 5G rollout is underway, 4G is expected to remain the primary network technology for the next 7-10 years, which could limit the adoption of 5G in the short term. Despite these challenges, the long-term benefits of 5G technology may outweigh the short-term challenges.
Opportunities
The capabilities of 5G technology unlock a new world of possibilities for various industries, including healthcare, transportation, and manufacturing. For example, the high-speed connectivity and low latency offered by 5G could facilitate remote surgery, providing patients with access to top surgeons from around the world. In transportation, 5G technology could enable self-driving cars and drones, revolutionizing the way people and goods are transported. As more 5G-enabled technologies come to fruition, we can expect to see a strengthened demand for the products and services provided by the companies in FIVG
Threats
As with any new technology, 5G presents potential threats that need to be addressed. The increased bandwidth and faster speeds provided by 5G require a commensurate improvement in cybersecurity measures. Additionally, the widespread adoption of 5G technology unlocks greater potential for IoT devices with varying degrees of security. As a result, companies must invest in measures to protect against potential threats that may arise with the increased use of 5G technology.
Conclusions
ETF Quality Opinion
FIVG invests in the next generation of technology capabilities. As noted above, this is a long-term growth idea and one I am most intrigued with. Thus, I have started my coverage of FIVG here, and aim to continue it regularly going forward.
ETF Investment Opinion
I rate FIVG as a Hold. I am optimistic about the future of 5G and the return potential of FIVG. However, it is hard for any of us at Modern Income Investor to get too excited about new long-term buys in an equity market still in serious turmoil. This is a future candidate for a more positive rating, but just not right now, at this price.
For further details see:
FIVG: The Growth Potential Of 5G Communication, In An ETF Package