Trouble Ahead For Smartphone ETF?

| About: First Trust (FONE)

The smartphone market - once a hot segment in the wireless telecommunication industry - seems to be losing its appeal. As per Gartner, global smartphone sales will slow down and not see its famed double-digit growth rate anytime soon.

The seven-year-long dominance of smartphones appears to be diminishing as sales are expected to rise 7% in 2016 to 1.5 billion units, way below the 14.4% growth seen in 2015. The pace is nowhere the 2010 levels when sales surged a monumental 73%. Smartphone sales are likely to total 1.9 billion units by 2020 per Gartner. In the first quarter of 2016, global sales of smartphones saw just 3.9% growth.

Another market researcher IDC also shares the same bearish view, projecting 2016 smartphone shipments growth at 3.1%, down from the 10.5% growth in 2015 and 27.8% in 2014.

Behind The Slowdown

The penetration rate has become low in the developed economies like North America, Western Europe, Japan and some Asia-Pacific nations. Though emerging economies still promise huge growth, the rate of penetration is thinning there too.

Going by the Gartner article, sales of smartphones in China saw an expansion of 16% in 2014 only to see flat growth in 2015. With smartphone sales in China comprising 95% of the total mobile phone sales in 2015, one can easily understand that this emerging market is maturing by the day.

Moreover, growth concerns and economic travails in the developed economies are restraining people from splurging on luxuries and replacing smartphones as frequently as they used to earlier. The only ray of hope is India, where the smartphone market is yet to ripen, according to Gartner.

Given this loss of momentum, a look at the pure-play smartphone ETF is imperative. The product could be in trouble in the days ahead (see all telecommunication ETFs here).

About FONE

First Trust NASDAQ CEA Smartphone Index (NASDAQ:FONE) is a passively managed ETF that looks to track the performance of the Nasdaq CTA Smartphone Index.

The product is well-diversified from an individual security perspective, with Sanmina Corporation (NASDAQ:SANM) accounting for 3.79%. Sony Corporation (NYSE:SNE) (3.68%), Samsung Electronics (OTC:SSNLF) (3.51%) and HTC Corporation (3.38%) hold the next three positions in the basket.

FONE picked up stocks from various regions of the world with the U.S. accounting for about 40%, followed by Japan (12.1%). The choice is unpopular with just $10.7 million in AUM. Holding 53 stocks in its basket, the product puts about 30% of its total assets in the top 10 holdings, suggesting moderate concentration risk.

As such, we have a 'High' risk outlook for FONE for the near term. The fund has returned just 2.6% so far this year (as of June 10, 2016), but lost about 8% in the last one year.

The fund has a negative weighted alpha of 4.90. A negative weighted alpha hints at losses. Moreover, with the tech sector going through tough times on subdued earnings and risk-off trade sentiments due to global growth issues, this smartphone ETF may have to struggle ahead.

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