Three ETFs For Smart Phone Exposure

by on October 29, 2010 | ETFs Mentioned:

After being hammered during the most recent recession, the technology sector has enjoyed a stellar recovery over the last 18 months, thanks to an impressive string of innovations that includes 3-D television, touchscreen tablet computers, and a new generation of mobile phones that seem to become both more sophisticated and more ubiquitous by the day. Smartphones exploded on the scene several years ago, and have since become a mini industry driving demand for computer chips and serving as a gauge for discretionary consumer spending. As demand for new and improved features has spurred aggressive marketing campaigns and product development efforts, competition in the smartphone space has intensified considerably [see also Will Tax Hikes Slam Telecom ETFs?].

The go-to image of a smartphone has long been the Apple iPhone, but for the past few years, several other devices have been nipping at the heels of Steve Jobs and company, with products like the BlackBerry, EVO, and Droid all taking market dominance away from Apple’s iPhone. For the second quarter of 2010, market share in the smartphone industry broke down as follows: Research In Motion (39.3%), Apple (23.8%), Google (17%), Microsoft (11.8%), and Palm (4.9%)–indicating stiff competition between the major producers as smaller companies chip away at larger firms’ market share [see also Rare Earth Metal Shortage Could Sink These Three ETFs].

Game Changers

Apple has recently made an announcement to shake up the smartphone industry, confirming that the iPhone will soon be available for Verizon Wireless customers, effectively ending the monopoly that AT&T held on the popular device. Some believe that this move is in response to the rising market share of Android devices, as Apple tries to hold its ground. The Verizon iPhone will hit stores in early 2011, but it is still unclear what the phones will look like, as there is speculation that Verizon may tweak the design a bit before releasing it to customers. This move to another network should come as no surprise, and should further increase the stakes in the smartphone war. AT&T also made an out-of-character move to offer service on the BlackBerry Torch this year (BlackBerry phones had been primarily offered by Verizon up to that point), perhaps in anticipation of losing the exclusivity with the iPhone.

Aside from Apple, Microsoft has announced the release of nine new phones in an attempt to compete in a market where the company thus far has had little influence. The phones will be sold on the AT&T network, and popular makers like HTC and Samsung will be producing some of the models, which will be able to boast the Windows 7 operating system. This is a critical move for Microsoft, as the company looks to expand its sales beyond the software industry and stay relevant in an increasingly mobile world. It will be a tough entry with so many formidable devices already on the market.

Who Benefits?

The smartphone industry represents one of the few high growth sectors left in the developed world. As many venture beyond U.S. borders to emerging markets to find high returns, there may be an intriguing investment brewing right under their noses. For 2010, the growth of the entire smartphone industry is expected to come in around 55%; the first half of 2010 saw growth of roughly 55% over the first half of 2009. And this growth is expected to continue, as analysts predict growth of roughly 25% for 2011.

A boost in smartphone usage could ripple throughout several industries. Aside from the obvious impact on manufacturers of the phones, semiconductor firms should see a boost demand, as these gadgets require complex chips to function. Big chip maker firms like Intel and Qualcomm will likely see a sales boost as they compete to provide the sophisticated processors for various smartphones. The telecom industry will also benefit from this battle, as companies will be competing to offer what they believe to be the best phone for their customers. Verizon recently released their own version of Sprint’s popular HTC EVO, and with the Droid and with the iPhone coming soon, it is clear that service providers are chomping at the bit to profit from this tech surge.

Meanwhile, as the smartphone war heats up, the ETFs tracking these technologies have also grown, allowing investors to make a play on this booming industry. For investors who believe that this industry is likely to continue to grow and is big enough to support all of the current participants, we outline three ETFs offering exposure to firms that stand to benefit from a prolonged smartphone boom:

Vanguard Telecom ETF (VOX)

This ETF tracks the MSCI US Investable Market Telecommunication Services 25/50 Index, which consists of stocks of large, medium, and small U.S. companies in the telecommunication services sector. This ETF will give investors good exposure to service providers, with Verizon, AT&T, Sprint Nextel, and Qwest Communications all in the top ten holdings of VOX. The fund holds all of its assets domestically, and has returned over 11.5% in 2010 [see VOX's fundamentals here].

HOLDRS Merrill Lynch Wireless (WMH)

This HOLDRS product represents an all-around play on the smartphone market, as it holds chip makers, service providers, and phone manufacturers. WMH’s top ten holdings include firms engaged in various parts of the smartphone market, including Qualcomm, Research in Motion, Verizon, Motorola, Nokia, and Sprint Nextel. WMH offers roughly 30% international exposure and directs the majority of its assets to giant and large cap firms.

Select Sector Technology SPDR (XLK)

State Street‘s XLK follows the Technology Select Sector Index, which includes various companies from all across the technology industry. XLK provides exposure to 86 securities in total, but some of the big names in its top ten holdings include Apple, Microsoft, AT&T, Google, Verizon, and Intel. The all U.S. fund focuses its assets on the hardware (48%) and telecom (24%) sectors and has generated returns of 1.7% this year [see XLK's performance charts here].

First Trust Smartphone ETF (FONE)

In August of this year, First Trust announced its plans to release a smartphone ETF (FONE) that would track the NASDAQ OMX CEA Smartphone Index. That benchmark includes companies primarily involved in the building, design and distribution of handsets, hardware, software and mobile networks associated with the development, sale and usage of smart phones. At the end of July, the index contained 81 securities. No launch date has been set for FONE [see more at First Trust Files For Smartphone ETF (FONE)].

Disclosure: Photo courtesy of Christian Lo and Renato Mitra. No positions at time of writing.