By Aaron Pressman
BOSTON (Reuters) - Eager buyers formed huge lines last week for a chance to buy Apple's iPad 2 before it sold out.
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Fund companies, excited to cash in on the "Post-PC" era of tablets and smart phones are trying to turn the Next Big Thing into the Next Big Investment.
The latest offering is an ETF that bundles together dozens of the sector's players into a Smart Phone index. In theory, it lets investors diversify in a number of stocks rather than putting it all in one,
Instead, it has shown how diversity can backfire when investing in sectors.
Much of the heat in the smart telephone market is generated by one company, Apple
With so many so many new players it's tempting to look for winners other than Apple, whose stock is not cheap after nearly quadrupling in two years. It remains near its all-time high of $364 and seems priced for continuing high performance, if not perfection.
The new exchange-traded fund, the First Trust NASDAQ CEA Smartphone Index Fund
The fund has attracted a respectable $15 million in the month it has been offered. But so far its performance has been disappointing. Since its debut, it has lost 11 percent.
Why has the fund fallen so much? And is it now a bargain? As with all ETFs, it pays to look beneath the labels and review the fund's actual content.
Not all device makers are prospering in the fiercely competitive mobile market of 2011. Gains for devices powered by software from Apple and Google
EQUAL WEIGHT FOR HEAVY WEIGHTS
RIMM and Apple have about equal weight in the ETF's index, followed closely by Nokia and Samsung. Since the fund debuted, its double-digit loss compares with Apple's smaller 2-percent decline while it topped the other main competitor, Blackberry maker Research In Motion's
Global smart phone giant Nokia
Jerry Jordan, manager of the highly-rated Jordan Opportunity fund
Jordan's fund has outperformed 97 percent of competitors over the past five years, thanks in part to a well-timed bet on Apple and other stocks benefiting from the popularity of mobile devices.
"Theoretically, you are always better picking two stocks than 12, but you better get the two right," he said. "The best idea is to buy half of the basket, so you still have some diversification, but you are still applying some skill."
WHEN IT PAYS TO BUY STOCKS, NOT ETFs
It's likely that some stocks included in the smart phone ETF could be hurt by the iPad's popularity, analysts warned.
Some tech stocks are in a "tablet bubble" that is about to burst as it becomes clear most consumers prefer Apple's products, JP Morgan analyst Mark Moskowitz reiterated on Monday. That could hurt makers of competing tablets like Samsung and RIM.
Money managers often consider the strategic benefits of ETFs versus individual stocks in putting clients' money to work.
A few months ago, Roger Nusbaum, chief investment officer at Your Source Financial in Phoenix, Arizona, decided to switch some of his clients' energy exposure to coal-related stocks.
But in the case of some fast-growing developing markets, Nusbaum skipped the ETFs entirely for more targeted exposure. The popular iShares MSCI Brazil Index Fund
For some themes or sectors, ETF "will be the best choice and for some others they will not," Nusbaum said. "It makes no sense that any single wrapper can be the best product for all times and all market segments."
(Reporting by Aaron Pressman. Editing by Richard Satran)