How to Play the $12 Trillion 5G Revolution

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Few tech trends have fueled as much excitement as 5G, the global push to bring us faster and more efficient Internet. Representing the next generation of mobile Internet, 5G is expected to create $12 trillion in new economic activity. The cloud-based mobile technology will disrupt existing markets and create new investment opportunities. 5G is still in its infancy – the first networks went online less than two months ago – but investment plays are already popping up.

This article is a primer on this emerging technology and how to integrate 5G into your investment strategy – capturing your slice of a multi-trillion revolution. What does 5G mean for economic growth? 5G technology (short for “fifth generation cellular network technology”) was first developed in late 2017, with the first networks coming online earlier this year. South Korea became the first country to launch 5G – according to a report from the BBC, more than one million South Koreans have already signed up for the service, outpacing the uptake of 4G back in 2011. Since then, the US, Bahrain, Switzerland, and the United Kingdom have all launched their own networks.

In a few years, it will be the global standard. 5G is going to generate massive economic growth. According to The 5G Economy, a widely-cited study by IHS Markit, Penn Schoen Berland, and Berkley Research Group, the new technology could enable $12.3 trillion in new goods and services by 2035. That’s roughly equal to US consumer spending in 2016. About $3.5 trillion will be generated by the 5G mobile value chain alone. For that to happen, a lot of new infrastructure needs to be built. Annual investment of about $200 billion is needed to reach the $12.3 trillion mark. The infrastructure push is already creating lots of opportunities for stock market investors.

What makes it different from 4G? The main difference is capacity. 5G is almost entirely cloud based. That makes it more efficient, with the extra capacity translating directly into faster speeds. 4G connections usually offer download speeds of about 20Mbps, allowing the user to download a two-hour movie in about 30 minutes. 5G will deliver speeds of 500 to 1500Mbps, enough to download that same movie in about 25 seconds. But 5G promises benefits beyond faster downloads.

Better coverage is another factor. A single 5G cellular tower can cover roughly 100 times more devices than can a 4G tower. Coverage areas will expand significantly. Latency will also decrease. Industry jargon for the time between a user issuing a command and the device giving a response, latency promises to be 1 millisecond or less in 5G-connected devices.

This real-time interactivity will enable innovations like the Internet of Things (IoT) and self-driving cars, driving much of the economic growth associated with 5G. Then, there’s the estimated 90% reduction in energy usage from 4G to 5G. According to the report from IHS Markit, the battery life for some low-power devices could be up to 10 years. This will allow IOT-connected devices to operate for longer without human assistance. And don’t sleep on IoT, which could now kick into high gear. 5G, with its increased capacity and faster response times, is well-suited to enable Internet connections between devices. GSMA estimates there will be 25.2 billion IoT-connected devices by 2015 (up from 9.1 billion in 2018), growth largely driven by 5G connectivity. ETF trades to watch 5G isn’t yet available to most consumers, but it already presents opportunities for ETF traders.

The following ETFs show the most promise as 5G networks roll out over the next few years. First, start watching the Defiance 5G Next Hen Connectivity ETF (FIVG). This ETF launched in March and directly tracks the Bluestar 5G Communications Index. The Bluestar covers companies that directly contribute to 5G network development. Leading assets include XLNX (5.93% of total assets), Ericsson (5.75%), and Skyworks (4.99%). The ETF is currently trading at $23.96, down slightly from its opening on March 5.

Next, look to the ALPS Disruptive Technologies ETF (DTEC). The DTEC has outpaced the S&P 500, gaining 22% since the start of the year. It is roughly indexed to the Indxx Disruptive Technologies Index, which covers companies using disruptive technologies in several areas. Each of these areas – IoT, healthcare, Smart Grid, Cloud Computing, AI, and more – are poised to benefit from 5G. Major holdings include Okta (1.42% of total assets), LendingTree (1.25%), and Silicon Laboratories (1.22%).

Another fund to watch is the Pacer Benchmark Data & Infrastructure Real Estate ETF (SRVR). Now trading at $30.34, the SRVR is up 32% since the year began. The fund includes data center operators (ex: Equinix) and wireless communications real estate (ex: American Tower). These subsectors will get a turbocharge from 5G, which is why the SRVR is outpacing the S&P 500 nearly threefold.

The ARK Fintech Innovation ETF (ARKF) could also get a boost from 5G. The ARKF covers Fintech service providers (mobile banking, lending, money transfers, etc.). These companies, including TenCent Holdings (6.44% of assets), Apple (5.56%), and PayPal (4.12%), stand to benefit from 5G. With faster Internet, lower latency, and better coverage, 5G will allow Fintech providers to deliver better services to more clients. As of June 19, the ARKF was trading at $22.51, up 10.3% from its launch on February 4.

How to trade the Huawei controversy While the future is 5G, uptake is being slowed by the ongoing US-China trade dispute. This has serious implications for investors, especially in the short term. On May 15, the White House announced a ban on US companies doing business with Huawei, a Chinese mobile tech manufacturer. Huawei is the world’s largest provider of communications equipment and, prior to the ban, Huawei was building 5G networks in countries around the world. The ban is politically motivated. The White House placed Huawei on the “Entity List,” a group of 190 companies and individuals considered to be security threats. Huawei is a private company that nonetheless has close ties to the Chinese government.

By preventing it from building 5G networks, the White House hopes to deny Beijing the ability to control the international communications space. The ban has been mirrored by countries including Australia, New Zealand, and Japan, with others (UK, Canada, France, Germany) considering similar bans. Whatever one thinks about the politics, the dispute has been a drag on stock markets. It has slowed buying of US semiconductor stocks, including for the chipmakers mentioned in this article.

While one can’t quantify exactly how much the ban has affected semiconductor stocks, it’s no coincidence that Qualcomm, Xilinx, and Skyworks each tumbled after the White House announced the ban. The book is yet to close. Some analysts speculate that a US-China trade deal (if it happens), will involve lifting the ban. Earlier this month, Russell T. Vought, the acting director of the White House’s Office of Management and Budget, asked for a two-year delay, arguing that the ban puts too great a burden on US telecom manufacturers. However, even if the ban continues, the 5G revolution is already underway.

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