Smartphone Revolution: There's An ETF For That

By Aaron Levitt | November 04, 2010 AAA

Despite the recent pressures of the ongoing economic malaise, the technology sector has seen its fortunes rise as a group of new hot devices have come to the market. From new tablet computers to 3D televisions, consumers have been opening their wallets regardless of financial pressures. One device in particular has managed to capture consumer's fascination as we live more active and on-the-go lives. Combing social networking, scheduling and other business functions, smartphones and mobile applications are quickly moving from wants to must-haves. These devices are popping up everywhere and demand is increasing exponentially across the globe.

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A Growing Market
According to research firm ComScore, nearly 45.4 million people in the U.S. owned smartphones at the end of February, up 21% from the previous three months. The mobile internet infrastructure boom is contributing to the success of smartphones and Wi-Fi/3G/4G enabled devices such as Apples (Nasdaq:AAPL) iPad. Less than 15 years ago, only 3% of the world's population even had a cell phone and less than 1% had access to the internet. In 2010, those numbers are closer to 50% and 25%, respectively. Globally, this build-out is helping stimulate adoption of smartphones. The worldwide market for the devices is expected to increase by over 50% in 2010 over 2009.

From chipmakers such as Qualcomm (Nasdaq:QCOM) and operating system programmers, the sector is seeing tremendous growth. This upwards trend of using a "phone" to make more than calls is spurring fierce competition among manufacturers along the entire value chain. AT&T's (NYSE:T) lock on the popular iPhone could be coming to an end. Verizon (NYSE:VZ) is expected to launch a CDMA version of the smartphone in 2011. HTC and Samsung have recently launched new iPhone "killers" and Google's (Nasdaq:GOOG) Android OS is eating away other operating system market share. For investors looking to find the individual long-term winners in the smartphone sector, it can be difficult.

There's an ETF for That
The growth in smartphone acceptance and usage is certainly there, however consumers are still fickle. Palm was the PDA darling at beginning of the decade; its operating system commands only about 5% of the total smartphone market. By betting on a basket of these companies, investors can diversify away from any potential losers in the mix.

The easiest way for investors to bet on the rise of smartphones is through the service providers. There's plenty of money to be made in providing all data, text messages and tweets for end users. The most liquid way to play the sector is through the iShares Dow Jones US Telecom (NYSE:IYZ). The fund follows 32 different companies within the telecomm sector including all the major wireless carriers. The fund charges 0.48% in expenses and yields 3%. Similarly, investors looking for broad exposure can use the Vanguard Telecom Services ETF (NYSE:VOX).

For a play on the equipment makers, the SPDR Morgan Stanley Technology (NYSE:MTK) is concentrated version of the more popular Technology Select Sector SPDR (NYSE:XLK). However, in this smaller portfolio, is included all the major smartphone equipment winners including a host of chipmakers, device manufacturers and OS creators.

The Bottom Line
Despite the economic headwinds facing the economy, smartphone usage is growing at a rapid pace. As these devices continue to become the standard choice with regards mobile phones, companies all along the value chain with benefit. By selecting exchange traded funds that focus on the equipment makers and service providers, investors can profit no matter how fickle consumers are with regards to device preference. The iShares Dow Jones US Telecom and the SPDR Morgan Stanley Technology are two of the best ways to play the trend. (For related reading, take a look at Smartphone Revolution Stirs Up Telecom Sector.)

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