The Weaknesses of 5G ETFs

Dear Reader,

Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.

If you have a question you’d like answered next week, be sure you submit it right here.

Why I’ve held off making crypto recommendations… for now

First up is a question on the digital assets space and what developments I’m waiting to see in the industry…

Jeff, I am truly grateful for your amazingly successful recommendations. I’m curious why we haven’t heard more from you about the crypto space. I follow all the Agora advisers on crypto, but none of them have your insight and none of them have utilized these early funding platforms. Of course, maybe you haven’t commented or recommended anything because you foresaw the soft market. In any event, I hope you will continue to track that area for us.

– Andy V.

Thanks for writing in, Andy. I’m happy to hear you’ve seen success following my research.

You’ve touched on a topic that has been a bit of a frustration for me. I am deeply knowledgeable about the blockchain industry. I’ve been studying, researching, and investing in blockchain technology companies for more than five years.

Long term, I am very bullish on the future of blockchain technology and digital assets. The impact will be as profound as internet technology has been over the last 20 years.

So why don’t I recommend cryptocurrencies in my research?

Well, I actually did way back in 2015. I recommended bitcoin around $236 if I remember correctly… And bitcoin reached $18,000 at its high.

Back then, it was very risky to buy and hold a cryptocurrency. Simple, honest mistakes could leave investors with a complete loss of capital. That kind of risk is not suitable for most investors.

I chose to focus on technology companies that would benefit from the explosion in growth of the blockchain industry rather than recommending cryptocurrencies themselves.

Subscribers of mine have been able to make large profits off of some of those recommendations, some of which are still in my Near Future Report portfolio.

I predicted the cryptocurrency collapse in late 2017, which led to the “crypto winter” that lasted for more than a year. By doing so, I kept my subscribers out of the carnage. Bitcoin, the best cryptocurrency, fell 82% during that time, and most cryptocurrencies fared even worse.

And I will never make a recommendation on an asset that I believe is going to collapse in price. My goal is simple – to make my subscribers money. I treat each recommendation as if I were investing my own money.

I’m happy to see the recovery in the market that started this spring. This is promising, but we are still at an early stage in the crypto industry. The tools to invest in cryptocurrencies have vastly improved. But there is still a lot more infrastructure that needs to be built.

And the biggest wild card that continues to give me pause is the regulatory environment. I spend time in Washington, D.C., through my affiliation with the Chamber of Digital Commerce. I believe it is critical to stay on top of developments in D.C. because they directly impact the potential of the blockchain industry.

Over the last 18 months, the regulatory environment has worsened for cryptocurrencies and initial coin offerings.

I admit that I’m perhaps being too conservative. But I’m not yet comfortable with making crypto recommendations to my subscribers.

Steer clear of this 5G ETF

Next up is a question about a 5G exchange-traded fund (ETF)…

Jeff, is there a 5G ETF that will be closely aligned with your portfolio?

– Dennis B.

Thanks for your question, Dennis. The short answer is no. And there’s a good reason I don’t recommend buying a 5G ETF.

For example, the largest 5G ETF is the First Trust Indxx NextG ETF (NXTG). It has $173 million of assets under management and tracks a basket of network equipment manufacturers, semiconductor companies, and data center REITs (real estate investment trusts).

For investors looking for broad exposure to a trend like 5G, that might sound appealing. But when we look under the hood, we see some questionable holdings.

Intel is a holding in the fund. As I’ve been telling readers, Intel is fading into irrelevancy. The company recently sold its German wireless modem unit to Apple for $400 million less than what it paid for it in 2010. Intel is not a company to buy for exposure to 5G.

Another holding is Sony. What the heck is Sony doing in a 5G ETF?

There are 100 companies in the ETF, and many have very little leverage to the world of 5G. Many companies in the ETF are also wireless network operators. These are the companies that have to spend billions of dollars building out the networks.

I don’t want to invest in those companies. I want to invest in companies that are selling technology products to the wireless operators. That’s where the best investment potential lies.

And then there’s the complicated history of NXTG. The ETF only debuted this May. Before that, it existed as the First Trust Nasdaq Smartphone Index Fund (FONE). This was a floundering “smartphone ETF” that was desperate to attract capital.

So what did it do? The fund managers latched on to the “next big thing,” dusted the fund off, gave it a new name, and relaunched it as a 5G ETF. And it worked. In May of this year, the fund had less than $14 million assets under management. Today, that number is $173 million, or more than 10 times more.

We should always remember that the companies that create ETFs are in that business for the fees. They like to see the number of assets increase because it increases their fee base. They’ll make money even if investors lose money.

This is why I say steer clear of this 5G ETF and ETFs in general. These fund managers often have no understanding of the underlying technology or the context for the companies’ status in their respective industries.

Dennis, I see you’re a reader of The Near Future Report. Please check our portfolio page for current large-cap 5G recommendations. Our portfolio is now broken up by investment themes, so our 5G plays will be easy to locate.

Each company has been thoroughly researched. Investing in a limited number of companies that have large exposure to a massive investment trend is a much better way to invest in 5G compared to a watered-down ETF.

(For investors who haven’t gotten exposure to the 5G megatrend, don’t delay. Every day that passes brings us closer to a 5G-powered future. 99% of investors will miss this massive trend. You don’t have to be one of them. I recently gave a presentation at the Shubert Theatre, next door to Yale University, on the investment potential of 5G. Get the facts for yourself right here.)

The “5G Miracle” is very real…

Finally, one skeptical reader has doubts about the “5G miracle.”

The 5G Miracle? I’ll believe it when I see it. Internet providers have always claimed phony up and download speeds. Why should we believe 5G claims now? Has anyone shot a YouTube video from Atlanta or D.C. showing that we have even caught up to South Korea?

– Robert S.

Thanks for writing in, Robert. I know the promise of 5G might seem too good to be true. As I’ve been telling readers, 5G will be – on average – 100 times faster than our current 4G networks. With that sort of bandwidth, we are going to see some incredible applications.

Fleets of self-driving cars, robotic surgery, and virtual reality simulations will be made possible thanks to 5G. And that’s why I’ve said 5G will be one of the best investment themes of this decade and next. The amount of wealth and technological innovation that will be unleashed is unlike anything we’ve seen before.

Not too long ago, I even spoke with an executive from the wireless industry, and she herself stated that she wasn’t sure if 5G was going to happen or not.

But that’s the thing about being a technology analyst. It requires an intense amount of research to do what I do and see what’s happening in the near future. Most view a particular topic from just one lens. I view any industry objectively from multiple lenses.

And I also believe in boots on the ground research. That’s why I sent a member of my analyst team, Nicholas Rokke, to investigate early 5G networks firsthand.

For comparison, the average download speed on 4G networks in the U.S. is around 16 Mbps.

That means that this early demonstration of 5G in Minneapolis is over 40 times faster than the average 4G in the U.S. already…

And keep in mind, the 5G network isn’t fully built out yet. Download speeds will likely reach up to 10 gigabits per second (Gbps) once the network is complete. As we can see, this is not a speculation, it’s the real thing.

Parts of both Atlanta and D.C. have active 5G networks up and running. Motivated readers can find a local Verizon, AT&T, or T-Mobile store to visit that has 5G phones for demonstration.

5G products may not be in every store yet, but I can guarantee that any city that has a live 5G network will have at least one flagship store demonstrating the technology.

That’s all the questions we have time for this week. Remember, if I didn’t answer your question, you can reach me here. I’ll do my best to get to it next week.

Regards,

Jeff Brown
Editor, The Bleeding Edge

P.S. There’s one last detail of the 5G rollout that I didn’t cover today…

Once 5G networks are live, every smartphone on earth – all 3 billion of them – won’t work over these networks. This represents the largest smartphone replacement cycle in history. And I’ve identified the one company that produces an essential component for the new generation of 5G phones. That’s why I called this company my “No. 1 tech stock of 2019.” Get the full story right here.