<p>InvestorPlace’s Vince Martin recently suggested Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) may be the best 5G game. While I admire my colleague’s chutzpah, I work to provide readers with potential alternatives, those that minimize the inherent risk of investing in Ericsson’s shares and other turnaround candidates.
Ericsson, like its Scandinavian counterpart, Nokia (NYSE: NOK), has not performed very well over the past five years, generating a total annual return of -5.6%. While 290 points better than Nokia, it is still a terrible return on investment when you consider the US markets as a whole increased by 10% over the same period.
The opportunity cost of owning these telecom stocks is still too high, no matter what their valuations may suggest.
“ERIC is traded at less than 15 times free cash flow based on 2019 figures. “If margins expand and sales grow, the multiple must either dip into the single digits or, which would be more likely, the ERIC share will have to rise,” Martin wrote on 11 February.
I recommend that you read his article. Vince’s argument is completely meaningful.
While each stock has risk, it would be a mistake to invest more than your minimum pension portfolio.
To me, the best 5G game is not a stock, but rather one of these two ETFs.
An inexpensive way to play Ericsson Stock
The largest ETF provider does not run the Defiance Next Gen Connectivity ETF (NYSEARCA: FIVG) in the world – Defiance ETFs LLC has only three thematic fund offerings – but it gives investors interested in capturing potential profits from Ericsson in the 5G arena a cheap way to do it.
It takes only 0.3% and generates a 30-day SEC return of 1.5%. Not bad for a lot of stocks trying to chase the next significant secular trend in technology.
In the case of Ericsson, FIVG weighs it at 4.54%, making it the fifth largest holding. Interestingly, Nokia holds the top spot at 5.74%. My colleague is not at all as positive about Nokia as he is Ericsson. If you feel the same way, this could be a business breaker. Of the 75 holdings in the portfolio, the top 10 account for 40% of total net assets of $ 251.6 million.
If you need a major ETF provider
First Trust is one of my favorite ETFs. In October last year, I recommended First Trust Indxx NextG ETF (NASDAQ: NXTG) as a possible alternative to Qualcomm (NASDAQ: QCOM).
In June, MarketWatch discussed how the powers of First Trust discarded the ETF’s previous smartphone to invest in 5G. “According to the article, NXTG, which debuted on May 29, managed to gain $ 110 million in new assets during the first three weeks of the conversion from the First Trust Nasdaq Smartphone Index Fund,” I wrote on October 22.
Today, NXTG has a total of $ 328.5 million in net assets, about 28% more than FIVG. A lead it takes despite having a management cost of 0.7%, more than double the Defiance ETF, and having swung to 5G a month or two after FIVG’s launch.
In addition, NXTG allocates 80% of its portfolio to 5G infrastructure and hardware, while the remaining 20% is allocated to telecom providers. All shares in the two segments are equally weighted.
I guess Vince would probably prefer this ETF over FIVG because Ericsson has a current weighting of 1.34%, only 34 points less than Nokia, which has the largest current weighting due to its performance so far in 2020.
I may be wrong with Ericsson and it will prove to be one of the best artists of the 2020s. If this is the case, I apologize in advance for persuading you to take a safer bet.
However, I doubt I will be wrong. If 5G turns out to be as big as everyone says it will be, both FIVG and NXTG will be long-term home runs.
I can sleep at night and give this kind of advice. I guess we’ll see how it goes.
Will Ashworth has been writing about full-time investing since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially likes to create model portfolios that pass the test of time. He lives in Halifax, Nova Scotia. At the time of writing, Will Ashworth had no position in any of the above securities.