By John Spence
An exchange-traded fund that invests in smartphone companies is
the latest gimmick in the $1 trillion ETF business.
The First Trust NASDAQ CEA Smartphone Index Fund started trading
Friday on the Nasdaq Stock Market under the ticker symbol FONE.
(Its shares finished down 0.3% at $30.21.)
"The index includes companies primarily involved in the
building, design and distribution of the handsets, hardware,
software and mobile networks associated with the development, sale
and usage of smartphones," said First Trust Portfolios L.P. in a
fact sheet on the fund.
"We continually evaluate opportunities to broaden the First
Trust family of ETFs, and FONE will enhance our unique specialty
sector offerings," said Robert Carey, chief investment officer at
First Trust, in a press release.
The Wheaton, Ill.-based money manager oversees more than $6
billion in ETF assets and has been in the business since 2005.
First Trust ETF strategist Ryan Issakainen said that before
launching any new fund, the firm establishes that investor appetite
exists and that the product has investment merit in a long-term
strategy.
"We're in the early stages of a secular trend that is
transforming how people access the Internet," Issakainen said.
"This ETF allows investors to participate in the growth of the
smartphone industry without taking on stock-specific risk. This a
very transparent, low-cost and tax-efficient way to do so."
The new fund will have an expense ratio of 0.7% of assets. The
average expense ratio for equity ETFs in the U.S. is 0.34%,
according to BlackRock Inc.
The tracking index classifies a smartphone as a "wireless
mobile-communication device offering advanced capabilities and
functionalities, including Web access, through the use of an
identifiable operating system," according to the fact sheet.
The benchmark holds 74 stocks in all. Its fact sheet lists
Celestica Inc. (CLS) and Nokia (NOK) as among the top 10 index
holdings.
Industry Perspective
Although the ETF business has been growing rapidly in recent
years, not every fund is a success, and many ETFs have been shut
down after failing to gather assets. In 2010, 173 new ETFs were
launched, while 49 funds were delisted. In 2009, 46 were delisted,
according to research from BlackRock.
There are hundreds of exchange-traded products with less than
$100 million in assets, and the industry has faced criticism for
introducing highly specialized funds and portfolios targeting
trendy sectors.
The smartphone fund will be an "interesting test" for the
progress of the ETF business, said Michael Johnston, senior analyst
at ETF Database.
"A few years ago, we saw a number of these hyper-targeted funds,
including some as granular as the Metabolic-Endocrine Disorders ETF
and the Wal-Mart Suppliers ETF," he said. "Those funds collapsed
due to lack of interest, but the ETF industry has grown
considerably since then."
On the surface, the idea of a smartphone ETF "may seem as
gimmicky as it gets," the analyst said.
However, he noted the underlying index is "constructed in a
manner that offers balanced, efficient exposure to a compelling
investment thesis: that smartphone adoption is on the
rise--especially in emerging markets where penetration rates are a
fraction of levels seen here in the U.S."
-By John Spence; 415-439-6400; AskNewswires@dowjones.com