For as popular as smartphones are, the First Trust NASDAQ CEA Smartphone Index Fund (FONE) does not get a lot of attention. When it came to market two and a half years ago, not only did FONE enter an arguably already saturated arena of technology sector ETFs, but the fund was also thought to be too much of a niche play.
FONE has proven the naysayers wrong, at least in terms of returns. While the ETF is small with just $8.9 million in assets under management, it has been a solid performer with a 14.2% year-to-date gain. That has FONE within striking distance of taking out price levels not seen since its February 2011 debut. [Smartphone ETF on the Line]
Interestingly, FONE has been a sturdy performer without significant allocations to the “usual suspects of the smartphone business – Apple (AAPL), BlackBerrry (BBRY), Google (GOOG) and Samsung. Of those stocks, only Apple is a top-10 holding in FONE. Combined those stocks represent just about 8% of FONE’s weight. [Earnings Ring Smartphone ETF]
FONE is not a traditional market cap-weighted ETF. Rather, the fund equal weighs its 63 components within the sub-sectors represented in the ETF. The resulting breakdown looks like this: “45% of the index weight is allocated to Handsets, 45% of the index weight is allocated to Software Applications and Hardware Components, and 10% of the index weight is allocated to Network Providers,” according to issuer data.
Semiconductors with smartphone exposure, including Qualcomm (QCOM) and Texas Instruments (TXN), are FONE’s largest sub-sector weight at 24.1%. While it may seem as though everyone in the U.S. has a smartphone, that is not the case globally, indicating that there FONE may have some fundamental tailwinds to drive future returns.
Qualcomm recently forecast fiscal fourth-quarter revenue of $5.9 billion to $6.6 billion after saying revenue for its most recently completed quarter surged 35% to $6.24 billion due in large part to soaring demand for chips used in smartphones.
Global smartphone penetration was just 31% at the start of this year, but that number is expected to rise to 50% in just four years, according to Standard Digital. Since March 2009, the S&P Global 1200 Telecommunication Services Index has climbed 50%, the publication reported.
FONE does provide ample exposure to growing smartphone use on an international basis as the U.S. accounts for less than 41% of the fund’s country weight. Emerging markets such as Taiwan and South Korea are integral plays in the smartphone business, whether it is through components or handset manufacturing. Overall, emerging markets are about 23% of FONE’s weight. [An Asian ETF Standout]
And it could be emerging markets that drive FONE higher in the future. Developing nations are expected to account for 65% of global smartphone sales this year, according to International Data Corp.
First Trust NASDAQ CEA Smartphone Index Fund
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Apple and Google.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.