Gimmick of the Week: A Smartphone ETF

With smartphones being all the rage, an ETF consisting of the major players in this business was recently brought to the market. FONE started trading some 3 weeks ago as MarketWatch reports:

“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.

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.

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.

While I like my smartphone as much as anybody else, I am not sure if an ETF in this very narrow area can actually survive.

Volume is simply not there yet to even give this ETF any consideration, and the expense ratio of 0.7% is way out of line. As with all ETF newcomers, I will want to see price data for at least 9 months in order to evaluate trends and momentum figures.

On the other hand, this could be one of those niche products that actually have a chance of prospering, but at this time there is no hurry to jump in. Over the next year, we should be able to tell if this is a worthy addition to the ever growing ETF menu.

Disclosure: No holdings

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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