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Wired on Wireless? There Are Plenty of Ways to Play the Sector

For investors, it's even harder than picking a cell phone plan.

When you go to sign up for a cell phone plan these days, you'll face a bewildering menu of choices: Will it be the flat-rate or the prepaid plan? Local or regional coverage? Roaming or no roaming?

You may be equally confused when trying to decide how to invest in wireless stocks.

You'll find a growing list of mutual funds that invest exclusively in the wireless industry. You'll also come across several unit investment trusts, those fixed baskets of stocks that are pricey, despite the fact they don't come with managers.

In the coming months, you'll probably see

Merrill Lynch

launch a new

HOLDRs

basket to invest in wireless stocks. Lest we forget, you can also go directly to the source and pick up a wireless stock or two -- if, that is, you feel comfortable betting on which companies will win in a constantly changing sector.

Now, you just have to figure out which option is right for you.

Fund Time

Even if you think that cell phones and wireless devices are the future of all communication, the past few months have shown you that investing in wireless stocks is a little less predictable.

A few months ago,

Nokia

(NOK) - Get Report

, the cell phone maker, looked like a sure thing. Then, the company warned in late July that its third-quarter earnings would fall short of expectations. The market, which had enthusiastically pushed the stock higher, knocked the stuffing out of it. Nokia fell 25% in a single day.

Mobile-phone operators, such as

Vodafone

(VOD) - Get Report

and

Deutsche Telekom

(DT) - Get Report

, have been hammered by investors who are worried about the big money the companies are spending for next-generation technology licenses in Europe. Vodafone is down 26.8% since the end of March, while Deutsche Telekom has fallen 50%.

Qualcomm

(QCOM) - Get Report

, which makes chips that go in mobile phones, was everyone's darling last year, rising a dizzying 2,619%. This year the stock has returned to earth, falling 64.9% over worries about the future.

Despite these recent problems, many professionals expect growth in cell phone use, wireless Internet access and wireless data transmission to continue driving this industry. Of course, that growth may be coupled with further violent swings in the sector's stocks.

The lesson: You may want a professional to be picking stocks for you rather than trying to do it yourself.

"If you want a good software company, it's not hard to pick the winners," says Todd Bernier, wireless stock analyst at

Morningstar

. "But in the wireless business, things are changing so quickly. These stocks will turn on a dime."

If you don't want to bear the burden of picking wireless stocks yourself, you'll find a

growing number of mutual funds that invest solely in the area.

Among the funds that have hit the market in recent months, there's the

(TIWCX)

Turner Wireless & Communications fund, from the Berwyn, Pa.-based firm known for its aggressive growth investing.

Investec Guinness Flight

launched its

(GFWWX)

Wireless World fund in late February.

TheStreet Recommends

Fidelity

, known for its panoply of sector funds, is coming out with its own

Select Wireless

fund at the end of September. The giant firm's sector funds have long been a destination for investors who are looking for specific plays on emerging industries. (These Select funds come with a 3% front-end sales charge.)

But you don't have to buy a fund with the word "wireless" in its name to get exposure to the handset makers, service providers and network-equipment manufacturers. For one, you can find plenty of broad communications funds that invest in wireless and the rest of telecommunications business.

Fidelity, for example, already has a

(FSDCX) - Get Report

Select Developing Communications fund that has been around for more than a decade. The fund's top-10 list from June 30 includes several readily identifiable wireless names, such as

Nortel Networks

(NT)

and Nokia.

The $3.2 billion fund's five-year annualized return of 35.2% puts it ahead of 92% of its peers, according to Morningstar. And among wireless-only funds, you'll have a hard time finding any kind of track record. Some of these funds are so new that they are hard to evaluate.

If you're interested in having exposure to only the big names in wireless, like Nokia or

Ericsson

(ERICY)

, you should check the large-cap growth funds that you already own.

"If that's the kind of thing you're looking for, chances are you already own it somewhere," says Chris Traulsen, a senior fund analyst at Morningstar.

For example, Nokia was a top holding in several

Janus

funds at the end of June. You may not need to buy another fund to get the basic wireless stocks that you crave.

Wireless Stocks Without the Manager

You'll also find a good number of unit investment trusts, or UITs, that invest in wireless stocks.

A UIT, in general, is a fixed portfolio of stocks or bonds with a finite life. When a trust expires or matures after a year or more, you can take your money out or roll it into another UIT.

All the well-known providers, including

Nuveen Investments

,

Van Kampen

and

Nike Securities

, offer wireless UITs, which typically are sold through brokers and financial advisers.

With a UIT, you know the exact stocks that you are buying upfront. No manager exists to make buy-and-sell decisions during the life of the trust. And you'll always be sure what stocks are in the basket.

But you'll pay dearly for this investment. UITs typically come with hefty sales charges that will eat into your profits.

With the 15-month Wireless UIT from Nuveen, you'll pay a total sales charge of 2.95%, paying 1% at the start and 1.95% over the life of the trust.

HOLDRs on the Horizon?

If you like the idea of buying a known portfolio of wireless stocks and don't think you need a manager to make investment decisions, you should keep your eye out for a HOLDRs basket from Merrill Lynch.

These securities also are fixed baskets of stocks, usually in a specific sector, that trade on the

American Stock Exchange

.

You would get an investment that resembles a UIT. But you would be able to buy it from a broker and pay a much cheaper commission, particularly if you use a discount broker.

Merrill hasn't filed to launch a wireless HOLDRs yet, but you might see one appearing in several months.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.