Guide to Internet ETFs - ETF News And Commentary

Though technology stocks have shown a nice comeback with most stocks gaining strongly starting this year, the sector has been hit lately as investors are dumping stocks due to profit taking and concerns over the Ukraine crisis.

Further, the technology stocks look expensive at current levels and the prospect of faster-than-expected monetary tightening in the recent FOMC meeting has compelled investors to pull out capital from this high growth and high beta sector.  

Currently, Internet is lagging the broad tech sector as most of the stocks, such as Facebook FB, Twitter TWTR, Netflix NFLX, Yahoo YHOO, Amazon AMZN and Linkedln LNKD, have plummeted double digits from their recent record levels, primarily thanks to lofty valuation (read: Buy These 2 Tech ETFs on NASDAQ Sell-Off).

Further, five of the six Zacks Industries that are classified as being in the Internet have negative outlook at present, suggesting rough trading for this segment in the coming days. Though the near-term outlook is disappointing, long-term trends in the Internet space appear promising.

This is especially true, as this corner of the broad technology space has enjoyed a strong rally over the past five years, gaining more than 300%. This trend is likely to continue this year thanks to growing Internet usage, rising global IT spending, improving overseas demand, technology innovation and surging popularity of e-commerce that will likely drive this space to the new age.

Given this, risk tolerant long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility. For those investors, we have highlighted two Internet ETFs that could be excellent picks given that the duo has a Zacks ETF Rank of 2 or ‘Buy' rating, suggesting that it will likely outperform the broad market index over a one-year period (see: all the Technology ETFs here).

First Trust Dow Jones Internet Index (FDN)

This is one of the most popular and liquid ETFs in the broad tech space with AUM of nearly $2.3 billion and average daily volume of more than 387,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year.

In total, the fund holds a small basket of 41 securities with Google GOOG as the top firm with 10.04% of assets. Amazon and Facebook occupy the next two positions at 7.30% and 6.57%, respectively. The fund is tilted toward large caps at 62% while mid and small caps take the reminder. Also, the ETF puts more focus on growth stocks with 75% share.

From a sector look, Internet mobile applications account for more than half of the portfolio while Internet retail and software & programing receive double-digit exposure. The ETF lost nearly 6% over the past one month.

PowerShares Nasdaq Internet Portfolio (PNQI)
 
This fund follows the Nasdaq Internet Index, giving investors exposure to the largest and liquid stocks in the broad Internet industry. The ETF holds 99 stocks in its basket with AUM of $390.8 million while charging 60 bps in fees per year. PNQI trades in moderate volume of less than 80,000 shares a day.

In terms of holdings, AMZN, eBay EBAY and GOOG occupy the top three holdings with 8% of assets each. The fund is titled toward large cap and growth stocks, as these make up for respectively three-fifths and three-fourths of the portfolio (read: 5 Best Performing ETFs of the 5 Year Bull Run).

In terms of industrial exposure, Internet mobile applications make up for about 69% of assets, followed by Internet retail and software & programing. PNQI is down over 6% over the past one month.

China Internet Market is Also Booming

Though Internet penetration is very low in China compared to the U.S., awareness and importance of the Internet is spreading rapidly among the Chinese. This is primarily thanks to surging demand for e-retail, growing broadband usage and technological advancements. Further, people are embracing e-commerce activities and PC sales are increasing, thereby fueling growth in this space.

In order to tap this rapidly growing Chinese Internet market, investors have only one option at their disposal – KraneShares CSI China Internet Fund (KWEB). This ETF provides concentrated exposure to the Chinese Internet market by tracking the CSI China Overseas Internet Index (read: China Internet ETF: The Best Choice in the Space?).

The product has newly debuted in the China ETF space, having amassed an impressive $78.2 million in AUM in just eight months. Holding 28 stocks, the product allocates a combined 26.14% of assets to Tencet Holdings (TCEHY), QIHO 360 Technology QIHU and Baidu.com BIDU.

The fund is slightly expensive, charging 68 bps in fees per year. Additionally, it trades in a moderate volume of over 58,000 shares a day, ensuring extra cost in the form of bid/ask spread. KWEB added just 0.6% in the past one month.

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AMAZON.COM INC AMZN: Free Stock Analysis Report
 
FACEBOOK INC-A FB: Free Stock Analysis Report
 
FT-DJ INTRNT IX FDN: ETF Research Reports
 
GOOGLE INC-CL A GOOG: Free Stock Analysis Report
 
KRANS-C CHN INT (KWEB): ETF Research Reports
 
NETFLIX INC NFLX: Free Stock Analysis Report
 
PWRSH-ND INTRNT PNQI: ETF Research Reports
 
TWITTER INC TWTR: Free Stock Analysis Report
 
YAHOO! INC YHOO: Free Stock Analysis Report
 
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