Four Ways to Invest in the 5G Revolution

5G is here, and it’s set to bring a number of changes to the way we transmit information, conduct business, and even interact with one another. With changes of this caliber, we are likely to see some industries disrupted and brand new ones formed. We are going to cover four ways to invest in the 5G wave. 

Investment #1: 5G Hardware and Infrastructure

Although 5G simply means the “fifth generation” technology standard for mobile networking, there are a number of new technologies and infrastructure changes that correspond to this. 5G is bringing enhanced speeds and bandwidth, as well as ultra low latency. This decrease in signal processing time is what will allow real-time communication of information.

5G signals will travel at higher wavelengths than the predecessor generations. Due to this, the signals do not travel as far and cannot penetrate through walls as easily. Therefore, 5G will employ new hardware called “small cells”. Instead of one large tower servicing thousands of devices, small cells will be placed throughout cities on power poles and rooftops. 

Small cells are one example, but there are numerous other new hardware technologies that are being deployed with 5G. This is a lucrative opportunity for internet hardware and infrastructure companies, as the rollout of 5G is spanning over the next ten years and will have a global footprint. 

Investment #2: Internet of Things (IoT)

The cross-section of Internet of Things (IoT) with 5G could have an entire encyclopedia of content within itself. 5G is going to bring the total emergence of IoT, because the technology enables the perfect domain for IoT to thrive. 5G’s coverage will be further-reaching than previous generations, meaning more devices can be connected than ever before. It also brings the increased bandwidth and ultra low latency that we discussed, meaning an entire new realm of possibilities for information that can be transmitted.

We are used to IoT in the sense of smart appliances, cameras, thermostats etc. But 5G will open the floor for micro-devices, mainly referring to sensors. These are going to be used in numerous capacities from agriculture, utilities, power generation, and autonomous vehicles, just to name a few. These IoT devices will lead to a connected world like we could not have fathomed twenty years ago. 

With this will come countless areas for investment. Quite literally, pick an industry and search “[chosen industry] + IoT”, and see what is already in progress. We covered some of the agriculture use-cases here.

Investment #3: Cloud and Edge Computing

All of these additional devices transmitting more information than ever before means one thing. There will be an even greater need for cloud infrastructure to process and contain information. Cloud providers will see significant demand increase as there will simply be more applications that capture more data. 

We will also start to see a new trend of cloud computing emerge. The focus of this is on placing the data centers even closer to the collection points. When considering autonomous vehicles, for example, the information transmitted from a sensor on a car in motion needs to be processed extremely quickly. Even though these signals travel at the speed of light, a data center 1000 miles away may not be as efficient when information is needed in a matter of milliseconds.

This new trend of cloud is called Edge Computing. The primary difference is that the data processing happens physically close to the collection point, or on the “edge” of the cloud. As 5G technology will allow this [almost] real-time communication, the infrastructure will be changed to accommodate it. You will likely see existing cloud providers shifting into this. New providers will also emerge that focus specifically on edge computing infrastructure.

Investment #4: Security 

With all of the new technology and communication touchpoints that 5G brings, one thing is certain. Security is not only going to be of utmost importance, it also has to be intertwined throughout a growing network. 

It starts with the 5G infrastructure. As software routing methods are replacing some of the older hardware mechanisms, new security standards and methods will have to be introduced. In addition, an entirely new industry of IoT device security will emerge. 

This also comes during an era where consumers have more attention than ever before on privacy. Companies that handle sensitive customer data will have to ensure that secure methods are used for storing, anonymizing and protecting this data across a wide variety of devices and applications. 

We have only scratched the service on 5G, cloud, edge, and IoT security. A connected world will undoubtedly be subject to cyber attacks and attempts from countless angles. The cybersecurity industry will begin to look completely different over the next ten years. 

Final Thoughts

5G is the most transformational new technology the world will experience in the foreseeable future. With this will come new ventures, companies, and plenty of avenues for investment. 

Five key rules to investing wisely in volatile markets

Investing during a volatile market can be intimidating. Large, daily price swings often lead to emotional decision-making and flawed judgment. Erratic market behavior can make even the most seasoned investors nervous about their portfolio holdings. When investing during a volatile market, invest wisely by keeping yourself rooted to these rules.

Before doing anything, secure your emergency fund

The first step has nothing to do with investing. Yet, this is the most important part, especially during volatile markets. It is crucial to have a six-month fund of necessary expenses (housing, bills, food, etc) stashed away. You’ve heard this before, but let’s talk about how it relates to investing.

Many have painstakingly learned in 2020 that anything can happen. Millions have lost jobs and entire industries have been turned upside down. This led to extremely volatile markets in which we have some seen market caps cut in half. This has had extreme negative effects on people that were not prepared.

Those that may have lost a job and had to liquidate investments to cover expenses may have only received a mere 60% or 70% of what they would’ve been able to draw one month prior. By selling and realizing a loss they’ve locked in their losses instead of having the flexibility to wait for stocks to rise again.

Situations like this magnify the importance of the emergency fund. Not simply from a personal finance perspective, but from investing as well. Before committing funds to your investment account you should be prepared to live without that cash for the foreseeable future.

Opportunities come along. Cash is king.

Don’t confuse this with the preceding text. From the standpoint of your investment portfolio, the cash in your emergency fund can not be touched. Nothing. Does not exist. What I am talking about here is the cash in your investment portfolio. 

Volatile markets bring quite an array of challenges, but with the right positioning challenges become opportunities. Cash is an extremely important tool that gives you the ability to act on opportunities. As the old saying goes, cash is king, and investing during a volatile market is the perfect time to test this theory. 

Having cash on hand gives you the ability to execute on an opportunity by purchasing shares of a company while it is “on sale”. Even if you currently maintain a portfolio and some of your positions declined in the short-term, you are able to buy in for a lower price and enter a position at a lower cost basis. This is what allows prepared investors to take advantage of downturns and come out with a better-positioned portfolio.

Opinions will differ, but it’s usually suggested to keep 5-20% of your portfolio in cash. (Obviously there are many factors here, so take this with a grain of salt and consult with a financial advisor.) 

Don’t try to time the market

It is impossible to know exactly when something is going to bottom out or hit an absolute high. Technical analysts will produce charts and figures on moving averages, relative strength indices, etc, but no one can predict the future. Rather than attempting to time a market low, stick to a routine.

A common method is dollar-cost averaging. This is simply the practice of dividing your allocable funds for a position over time and entering at defined intervals. For investors that set aside a certain amount each month to invest, this concept is particularly effective. Rather than attempting to time the market and possibly succumbing to emotional pressures, using a simple formula like this usually is much more effective over time. This eliminates the common problem of “waiting until the right time” (which usually results in missed gains).

Stick with what you know

Investing in a volatile market is not a time to be adventurous. You may be surprised, but this can be more difficult than you’d think. Volatile markets always include increased news attention and overall “jitter”. There are more micro influences during these times and everyone seems to become professional investors or economists overnight. Stock market talk will creep into conversation more and more among friends and at the dinner table.

With increased attention to the markets and large swings, you’re bound to see extraordinary returns, and collapses. Take Eastman Kodak Company (aka Kodak, the analogue photography company). After a potential $765 million contract was introduced for the company to produce an ingredient used for COVID-19-related pharmaceuticals, the company immediately pushed a press release that sent the stock flying. KODK closed at $2.13 per share July 23rd before jumping to $33.20 six days later on July 29 (a 1458% gain). By closing Friday, Aug 21, it had fallen down to $6.88 per share. 

Similar situations arise during volatile markets and can be easy to fall for, but this is where it’s important to stick to what you know. Yes, it may be hard to sit out on some of these as they’re rising, but you’ll be satisfied when you see your portfolio continuing to outshine in the long-term by not being susceptible to these influences. 

Another point on this topic is the move to alternative financial instruments and markets, such as options, futures or foreign exchange. Similar to above, there will likely be increased influences that may drive you to consider pursuing enhanced returns. This is absolutely not the time to devote any attention or funds to a new venture in complex instruments. These are complex and take months, if not years, of research to learn and practice.

Remember the basics: Shop for deals

The best thing about declining stock prices? Deals, deals, deals. Benjamin Graham and Warren Buffet, two wildly successful and enduring investors, heavily reinforce this concept of value investing. As a value investor, you should be searching for quality companies that are poised to have future growth and positive cash flow. In addition, it’s best to find these companies on sale, AKA when the stock price and accompanying market cap may be under the intrinsic value.

Volatile markets may be characterized by large swings, but sometimes they do provide opportunities to invest in quality companies at a lower price. For investors that have a bit of cash on hand, this can be the right time to buy ownership in those companies.

Final Thoughts

Investing isn’t easy, especially in volatile markets. That’s why it’s important to have a plan and stick to it. Investors that follow their blueprint and aren’t swayed too much by external influences will often come out better than ever. 

Four Reasons for Investors to Avoid Leveraged ETFs

Everyone wants to see their portfolio increase in value. It’s the reason for investing. Investors in today’s time are consistently barraged by news, solicitations for financial products and competitive micro influences that make you question if you are doing enough in your portfolio. So, there is no surprise that investing eventually leads to the question of how to get even better returns in less time. Starting in 2006, some Wall Street firms have tried to capitalize on this emotion with leveraged ETFs. 

What are Leveraged ETFs

Leveraged ETFs are simply ETFs (Definition of ETF) that have additional amplification of returns by utilizing derivatives and debt. The firms selling these generally use borrowed money for the acquisition of options contracts, to track the daily return at a specific multiplier. You will typically see a leveraged ETF in the form of “2X” or “3X” of the index it tracks (3X S&P 500 ETF for example), meaning that the ETF tracks the daily price movement with a 2X or 3X multiplier. 

At first sight, this may seem like a wonderful idea. After all, if you are bullish on a particular index or industry, why not capitalize on the gains? Unfortunately there are some considerable drawbacks, and we have outlined four primary reasons to avoid leveraged ETFs below.  

Reason #1: Compounding Losses Outweigh Gains

This is the most significant reason to watch out for leveraged ETFs. Just as a leveraged ETF can produce magnified gains, the exact same thing can happen with losses. What is important to consider here is the compound effects of losses on the overall asset.

Let’s take the scenario below, in which an index we are tracking falls four trading days in a row, by 1.5% each day. Then, on the last day, it recovers by 6.23%, bringing the original investment of $100 back to even. Notice the returns of the 3X leveraged ETF. Even with the momentous gain of 18.69% (6.23% multiplied by 3), it does not return to the initial investment value.

This is because losses are magnified even further with compounding. Over time, a leveraged ETF will perform poorly relative to a normal index ETF.

Reason #2: Fees

Leveraged ETFs, unlike passively managed index ETFs, are actively managed. They typically have fees that can go unnoticed if you do not take the time to do your research. These fees are called expense ratios. While essentially all Mutual Funds and ETFs have a non-zero expense ratio, they typically are considerably higher than the standard index ETFs. This can add up over time and really reduce overall performance. Make sure you take the time to evaluate the fees before making any decision to invest.

Reason #3: Liquidity

If you must dabble with leveraged ETFs, be sure to check the average volumes to ensure there will be enough liquidity. This ensures that when you decide to sell you are able to execute the trade close to the market price. Low volume can seriously harm investors, especially on a down day, if you are attempting to exit a position and can’t get the order filled. Some leveraged ETFs trade with significantly lower volumes than their normal index counterparts, so you will want to check this before entering. In fact, as a rule you should be sure to check this for any position you enter.

Reason #4: Built for Traders, not Long-Term Investors

Leveraged ETFs consistently draw criticism from Wall Street. This is because of the widespread opinion that a leveraged ETF is a tool for traders, and not long-term investors. Because of the heightened volatility and effects of compounding losses, this can drag down your portfolio over the long-term.

You can never time the market, and we believe that you can set yourself up for serious risk by attempting to enter a position in a leveraged ETF. Even with the intent of only holding for the short-term. 

Summary

There can certainly be some positive upside to a leveraged ETF in the form of amplified gains for short-term trading. However, we believe they do not suffice as a worthwhile long-term investment. 

Diversifying your portfolio with ETFs

ETF is a word you are likely starting to hear more and more, especially with the recent rise of robo-advisors and automated investment platforms. But what does it stand for, and more importantly, what good does it actually do?

ETFs Explained

ETF stands for Exchange-Traded Fund, and it is simply a pool of stocks that are grouped together under one package. This package is then traded on a stock exchange, like a stock, with its own ticker symbol.

So say you believe in the future of a specific niche, maybe cybersecurity. You’ve heard of a couple of cybersecurity companies and want to invest, but you’re worried about sinking all of your eggs into one basket, or overallocating to one company. This is where ETFs can come in handy. ETFs are offered on virtually any asset class, and generally in both directions (perhaps you are bearish on a particular industry). This gives you the ability to diversify across a number of companies, and you can find ETFs on almost any traded commodity.

ETFs are very similar to mutual funds in the sense that they’re a fund, have a manager, and generally track a specific index. They were first introduced in the US in 1993.

As with anything in the investing world, there are drawbacks to consider.

The details

Similar to their cousins, mutual funds, a lesser known fact about Exchange-Traded Funds is that they do in fact have fixed fees associated with owning the position. These are called expense ratios. These are generally much lower than mutual funds, and ETFs do not have the other fees, such as 12b-1, that mutual funds carry.

While ETFs are generally extremely liquid, you’ll want to check volume and bid-ask spreads. This especially applies for any that are off-the-beaten-path, such as leveraged funds. This will save you when it comes time to sell.

ETFs, and mutual funds alike, are legally required to provide a prospectus. A prospectus is a document entailing all of the securities the fund holds, with percentage allocations. You’ll always want to review this before acquring a position, and it is a good idea to check it occasionally while holding.

Overall, ETFs are a wonderful tool for gaining exposure to markets while reducing company-specific risks along the way.

Investing in Technology Mutual Funds

Technology Mutual Funds and ETFs alike are becoming increasingly prevalent across multiple industries in the rapidly-changing investing landscape. When it’s time to make investment decisions in your 401k, IRA or brokerage account, these funds are inching their way into view. They are generally associated with high growth and above average volatility. But, after all, so many companies identify as “technology companies” now, so what companies are these funds actually comprised of, and how do you choose the best one?

The ultra-wide umbrella of “Technology”

When prospecting tech funds, the first thing you should do is familiarize yourself with the various sub-industries that all fall within the “technology” umbrella. Computer hardware manufacturers have a much different cost and revenue model from a cybersecurity company, for example, and can be subject to entirely different risks. 

A small subset of the common categories is listed below. Note that some of these have blurred lines and could share commonalities with other categories. See if you can name to yourself a company that would fall under each of these.

  • Technology Services
  • Computer Hardware Manufacturing
  • Cloud Computing 
  • Consumer Electronics
  • Cybersecurity
  • Software as a Service (SaaS)
  • Platform / Marketplace 
  • IT Services
  • Enterprise Software
  • AdTech

As you can see, there is a vast array of categories. They all have their own cost structures, macroeconomic factors, revenue models, risks, etc that ultimately fall under the tech umbrella. When you are evaluating a mutual fund’s holdings, note which categories the majority of the holdings would fall under. This will help you establish an initial understanding of the fund structure from a perspective of risk and correlation between companies.

The difference between growth and value still applies

Tech companies have historically been labeled as growth opportunities. This is generally due to perceived scalability and the fact that a significant number have been founded just within the last 20 years. But it’s important to take a step back here and make an additional effort to read between the lines. While the difference between growth and value investing still applies for technology companies, the industry can be extremely volatile and fast-changing. 

What this means is that young “growth” companies can see their technology become outdated almost overnight. On the same token, companies that are 100 years old can continuously expand into newer niches with fresh market potential. What may have been considered as a “value” play by traditional standards can quickly become a growth opportunity. This means that when evaluating funds from this perspective you will want to first double check the prospectus and holdings. Then try to familiarize yourself with some of the key revenue drivers for the companies to form a general idea of what some of the companies are investing their resources in. 

Know your benchmark

A benchmark is a standard that you can measure performance against. When evaluating the performance for general mutual funds (say a large-cap value or small-cap growth), typical benchmarks are the S&P 500 for funds with larger companies, Russell 2000 for funds with small-cap companies, and the Wilshire 5000 for a better benchmark of “the entire market”. For bonds, the Barclays Capital U.S. Aggregate Bond Index is typically the benchmark. 

What about technology? Since these funds will often have a mixture of small-cap and large-cap companies in industries across the board, what is an appropriate benchmark? You’ll find that the benchmarks these funds track against vary considerably. One common index you’ll see funds benchmarked against is the Morgan Stanley Capital International All Country World Index (MSCI AWCI). This is a diversified index that tracks companies from approximately 23 developed countries and 23 emerging market countries. The MSCI AWCI is widely considered as the broadest global equities index. Other indexes may be industry specific, like the MSCI Telecommunication Services and MSCI Software and Services indexes.

No benchmark is necessarily “wrong” or “right”. However, when allocating your hard-earned capital it’s important to know what companies, industries and countries your money is being measured against. This will give you a better idea of what performance the fund managers are aiming for.

Don’t forget the mutual fund fundamentals

This part is crucial. Regardless of the benchmark or specific industry, you are still investing in a mutual fund. Don’t forget to review the important pieces. This will be extremely important when determining what may be the best technology mutual fund for your portfolio.

As we have discussed, there are no one-size-fits-all “technology” benchmarks, so passively-managed technology funds are typically hard to come by. As a matter of fact, at the time of writing in July 2020, googling “passively managed technology mutual fund” does not even return a single direct match. What this means is that virtually all of the tech mutual funds are actively managed. What does that mean?

Fees. While the average expense ratio for a passively managed index fund is currently hovering between 0.1% – 0.3%, the average expense ratio for technology mutual funds typically falls between 0.5% – 1.3%. This is a significant difference that can start to chip away at your returns, making it even more important to know where your money is going. There are also the other fees such as 12(b)-1 and load fees to watch out for. 

The summary

We get it – the point of a mutual fund is to achieve diversification while reducing the need for heavy research into each separate holding. But, with a few hours of effort spent conducting your normal mutual fund due diligence in addition to dissecting these funds to learn more about the specific industries these companies operate in, you can hopefully become more comfortable in where exactly your money is going. And you may learn something cool along the way 🙂