INVESTORS LOOKING FOR the next big tech innovation may need to look no further than investing in 5G companies and infrastructure.
“5G technology has the potential to be transformational as the next generation of wireless access technology,” says Sarah Henry, portfolio manager of the dividend performers strategy at Logan Capital Management.
Henry says the advent of 5G capability is expected to bring expanded system capacity, higher data throughput rates, lower rates of delay, increased reliability and lower power consumption than 4G internet. In other words, the average consumer or business that relies on wireless services can expect better coverage and much faster connectivity speeds on a 5G network.
An abbreviation of fifth-generation, 5G internet services began rolling out on a limited basis in the U.S. in 2018, with more widespread coverage expected in 2020. A few 5G companies: AT&T (ticker: T), Sprint (S), T-Mobile (TMUS) and Verizon (VZ). All of these wireless service providers offer 5G speeds for mobile, residential and business internet.
It’s not just another generation of connectivity, says Lisa Chai, senior research analyst at ROBO Global. “Scaling the 5G project is extremely ambitious, requiring multiple new technologies and a fundamental change across existing network architecture.”
Josh Simpson, investment advisor representative at Lake Advisory Group, likens the disruptive capabilities of 5G internet to the introduction of the iPhone and that technology’s role in reshaping the cellular industry. From an investor perspective, 5G companies and exchange-traded funds could prove profitable for early entrants.
“The benefits of investing in new technologies is the opportunity to get in on the ground floor and realize significant gains,” Simpson says.
With that in mind, here are three tips when it comes to 5G investments:
- Look beyond internet companies.
- Diversify investment vehicles.
- Be realistic about risk.
Look Beyond Internet Companies
There’s more to investing in 5G than focusing solely on internet providers, says Paul Dellaquila, president of Defiance ETFs, which recently launched Defiance Next Gen Connectivity ETF (FIVG), the first 5G ETF.
“What makes 5G so disruptive is the breadth of commitments made by companies who want to make the leap to 5G and believe in the advancement of this technology,” Dellaquila says. “Telecommunications companies, governments, infrastructure providers and hardware firms have been researching and developing 5G capacities for years and are now on the cusp of launching or have already launched.”
Focusing solely on companies that are the most visible during the rollout, such as Verizon and Sprint, could mean missed opportunities for investors. For example, Chai says ROBO Global’s approach revolves around investing in 5G companies that are enablers, versus internet operators that are deploying the technology.
If you’re trying to make a short list of 5G stocks, then take a peek at companies like Qualcomm (QCOM) and Infineon Technologies (IFNNY), which provide advanced chip solutions for 5G infrastructure. Companies in the test and measurement space, such as National Instruments Corp. (NATI) and Koh Young Technologies, provide 3-D inspection systems for mobile devices.
Beyond those companies, Apple (AAPL) could be another company to watch if it launches a 5G mobile phone this year as anticipated, says Anthony Denier, stock market expert and CEO of Webull. “Other areas that will benefit from 5G include fiber-optic technologies, radio antennas, network access equipment and companies that deal with cloud computing.”
Diversify Investment Vehicles
The obvious choice for investing in 5G network innovations may be purchasing individual 5G stocks but it’s possible to gain exposure through other avenues. Mutual funds, ETFs and real estate investment trusts can all yield opportunities for investors to jump on this new bandwagon.
“A good way to invest in the sector is to look for tech funds or ETFs that focus on communications,” Denier says. “That way, you can have a diversified portfolio of the sector, which will allow you to capitalize on the winners and not put all your money into one stock, which could end up a loser.”
The Technology Select Sector SPDR ETF (XLK), for instance, isn’t focused exclusively on 5G. Instead, it holds all the tech stocks in the S&P 500. The ROBO Global Robotics & Automation Index (ROBO) offers exposure to 5G through investments in companies that fit the 5G enabler mold described by Chai. Similarly, the Pacer Benchmark Data and Infrastructure Real Estate SCTR ETF (SRVR) invests primarily in data center and cellphone tower REITs, offering exposure to 5G infrastructure providers.
Investors also have the option of investing in REITs directly. Some of the top 5G REIT options include American Tower Corp. (AMT), Crown Castle International Corp (CCI) and Digital Realty (DLR). The first two REITs are cell tower-focused, while DLR is a data center REIT.
Spreading out investment dollars spreads out risk. On the other hand, a 5G ETF like FIVG can offer greater concentration for investors. FIVG spans approximately 60 global companies that may benefit from the expansion of the 5G market, including Nokia (NOK), NXP Semiconductors (NXPI), Qualcomm and Analog Devices (ADI).
Be Realistic About Risk
Investing in new technology, such as 5G infrastructure, has both pros and cons. Assuming the tech takes off, investors could reap the benefits. But it’s important to weigh return potential against the various unknowns that could increase risk.
Simpson says the drawbacks are straightforward, in that there’s always a risk of new technology not being adopted as widely as anticipated or unforeseen obstacles delaying implementation. Another risk is an uptick in the number of companies popping up to try and claim a share of the market.
“Inevitably, there will be a lot of new and smaller, unproven companies that will be available to invest in,” Simpson says. “While some of those companies will ultimately survive or be purchased by larger competitors, the reality is that most of them will fail.”
Investors buying into smaller companies in the hope of backing the next 5G giant may be disappointed. For Chai, there’s a simple solution to avoiding this kind of risk.
“Because it’s impossible to time the market and pick the big winners or losers early on, we believe that diversified exposure to the market leaders with proven technology experience provides the 5G investment opportunities,” she says.
In other words, investors may want to lean toward the established innovators in the early days, rather than gambling on up-and-comers. And of course, consider the timeline for realizing returns from 5G investments.
“Investing in new technology or anything that’s going to revolutionize the market takes time to catch on,” Simpson says, so it’s important to temper the desire for profits with patience.