Will a smart-phone ETF ring up investors?

A new fund that tracks the industry is an expensive marketing ploy, critics say.

By Kim Peterson Feb 21, 2011 1:20PM
Image: Worried Man (© John Howard/Getty Images/Getty Images)Last week saw the launch of the first exchange-traded fund focused exclusively on smart phones. The fund, from First Trust Portfolios, tracks mobile networks and companies that make handsets and handset software, Morningstar reports.

The fund is called First Trust Nasdaq CEA Smartphone Index(FONE), and the ETF is bound to generate some excitement, as investors already are enthused about smart phones and sector leaders like Apple (AAPL).

But critics are already saying it's unnecessary and too narrow. It tracks the Nasdaq OMX CEA smart-phone index, which is made up of 73 companies, Morningstar reports. U.S. companies, including Apple and Motorola Solutions (MSI), are the bulk of the index, with about 44% of assets. Companies from Taiwan, Japan and South Korea are also represented.

A First Trust executive defends the ETF in the following video.

Post continues after video:

Matt Hougan at Index Universe says he has two main problems with this fund: It's more of a marketing idea than anything else, and there aren't enough pure-play smart-phone companies to fill the fund adequately.

For example, he writes, the fund includes Agilent (A). Agilent is not a smart-phone company, and probably not more than 20% of its revenue is tied to smart phones, Hougan adds.

And Google (GOOG), also part of the fund, counts on smart phones for only about $5 billion out of its $29 billion in annual revenue. "A 17% exposure to the mobile market warrants inclusion?" Hougan asks.

There are cheaper ways to invest in this sector. The ETF has an expense ratio of 0.70%, Morningstar notes. Take a look at the SPDR S&P International Telecommunications Sector (IST), which charges an expense ratio of only 0.50%. You can find the same expense ratio in the SPDR S&P International Technology Sector (IPK), Morningstar adds.
Tags: etf
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