Beyond Apple, ETF offers smart phone options

BOSTON (Reuters) - Eager buyers formed huge lines last week for a chance to buy Apple's iPad 2 before it sold out.

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 . It's not that others are failing to sell products. Overall smart phone sales soared 89 percent to 101 million in the latest quarter from the prior year, according to market researcher Canalys. Much of that comes from Apple-chasers like Motorola Mobility and Samsung Electronics <005930.KS>.

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 , is designed to let investors play the mobile device trend more broadly by putting bets on more than one horse in the sector. In fact, it has about 73 different stocks.

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 in the United States have come at the expense of Research In Motion's Blackberry, for example. And Nokia tossed out its current software platform to tie up with Microsoft's Windows Phone 7.

Too much diversification can wash out any gains, as in the case of the smart phone ETF. It's hard to come out ahead if you bet on every horse in a race.

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 , which lost 13 percent.

Global smart phone giant Nokia