A 5G-themed ETF is the latest to try and tap into a hot trend, even as scores of thematic funds ‘flame out’

Defiance

The first exchange traded fund to invest in 5G – the next generation of wireless technology – launched Tuesday.
The new ETF, launched by a company that manages funds for disruptive technologies, invests in equipment, mobile network operators, real estate businesses, and other components of 5G networks.
ETFs centered around specific themes, like 5G, are becoming big business for asset managers, who can charge higher fees than they do for funds that track indexes like the S&P 500. But many of the specialty funds fail to gather enough money to last.

5G – the next generation of wireless technology – is set to supercharge smartphones and underpin innovations, including self-driving cars.

While the nascent technology won’t be widely used for years, Defiance, a startup exchange traded fund provider, is betting that the businesses related to 5G will take off as the technology evolves. On Tuesday, the New York-based company launched the Defiance Next Gen Connectivity ETF, which trades on the New York Stock Exchange as FIVG, the first ETF to invest specifically in 5G.

Paul Dellaquila, who left BlackRock last year to join Defiance as head of ETFs, told Business Insider that 5G is "a superhighway" that allows faster speeds, more geographic access, and greater mass application than 4G or its predecessors.

"It has massive ramifications for what’s going to happen over the next decade," Dellaquila said.

See more: What is 5G, how fast is it, and when is it coming?

In 2017, a report from research company IHS said that in 2035, the 5G value chain will generate $3.5 trillion and support 22 million jobs globally.

Thematic funds are surging in popularity, but sometimes ‘flame out’

Managers are launching more thematic ETFs, like FIVG, partly as a way to make up revenue from cheaper market funds that track broad parts of the market.

"For some investors, thematic ETFs have taken the place of stocks that offer long-term growth potential," Todd Rosenbluth, the head of ETF and mutual fund research for CFRA, told Business Insider. "Investors benefit from the diversification at the security level but can play the broader theme. For asset managers, these long-term strategies can charge a premium price rather than face the same pressure to charge minimal fees in a race to the bottom for asset allocation products."

Despite their popularity, Ben Johnson, Morningstar’s director of fund research, cautioned that thematic funds sometimes "flame out in a catastrophic fashion." Many fund sponsors pick a theme relating to headlines – cybersecurity when major companies get hacked, for example – and launch funds that fail to gather significant money.

"It’s easier than ever to grab a handful of pasta and throw it at the wall to see what’ll stick with investors," Johnson said. "Most of these strands of spaghetti have failed to stick to the wall … Either the theme is just a flash in the pan, they get the theme right but the firms wrong, or the valuations aren’t favorable to investing in that particular theme. A lot of these funds wind up dying on the vine."

The fund could appeal to millennial investors

Defiance manages two other thematic ETFs, one for augmented and virtual reality, and the other for quantum computing. Together, the funds have just under $10 million. Dellaquila said his firm is looking for long-term themes, rather than quick market trends.

“Our belief is that investors have shown an appetite for more narrowly focused ETFs so that they can better express a specific view in their portfolios,” he said. “All investments have a certain amount of cyclical nature to them, but we are providing exposure to areas of the market that we believe will change our everyday lives for years to come.”

Sign up here for our weekly newsletter Wall Street Insider, a behind-the-scenes look at the stories dominating banking, business, and big deals.

Defiance’s 5G fund goes beyond the major telecommunications companies, such as Verizon and AT&T, to invest in 5G’s supply chain. Half of its holdings are in companies that provide core equipment, such as routers and antennas. It also invests in real estate investment trusts, which own cellular towers, and enhanced mobile broadband companies, among other parts of the 5G ecosystem. No company accounts for more than 5% of the ETF’s holdings.

"The way most people go about building tech exposure is with tools that are 20 years old," said Defiance’s chief executive officer Matt Bielski, formerly the head of asset allocation and ETF distribution at Direxion. "What we want to do is bring something a little bit different to the table."

Those older tools – funds that track communications indexes – have not hurt for capital. Vanguard’s US communications ETF, for example, manages about $1.5 billion.

Dellaquila expects the FIVG to appeal to millennial and Generation X investors. After the fund has a track record, he said institutional investors may also be interested.

The ETF, which launches with $2.5 million in assets, has a 0.3% expense ratio, meaning that for every $10,000 invested, the investor pays $30. That’s just over the average 0.27% average fee for sector-specific passive funds, according to a Morningstar report from last year.

NOW WATCH: Western Union CEO: Migrants are responsible for $600 billion in payments a year, yet they "have no voice"