Market Overview

ETF Showdown: Log On For An Internet Battle (PCLN, GOOG, FDN)


With Apple (Nasdaq: AAPL) running the show for the Nasdaq, technology sector ETFs and the tech sector at large this year, it might be easy to forget there are some other high-flying, triple-digit stocks that are widely followed and viewed as important players in the tech universe.

And that means there's more to the tech ETF game than just the PowerShares QQQ (Nasdaq: QQQ) and the Technology Select Sector (NYSE: XLK), favorite Apple proxies to be sure. In fact, focusing on Internet stocks has been a rewarding play this year and that gives the foundation for an intriguing ETF showdown between the First Trust Dow Jones Internet Index Fund (NYSE: FDN) and the PowerShares NASDAQ Internet Portfolio (Nasdaq: PNQI).

Given that the First Trust Dow Jones Internet Index Fund is almost six years old and is home to almost $533 million in assets under management, it is often viewed as THE Internet ETF. On the other hand, the PowerShares NASDAQ Internet Portfolio is almost four years old and has $63.1 million in AUM. Both funds have expense ratios of 0.6%, but PNQI is about 50% larger in terms of holdings with 63 compared to 41 for FDN.

For those that like to use ETFs as a way of gaining exposure to triple-digit stocks FDN and PNQI are both fine ideas. Google (Nasdaq: GOOG), Amazon (Nasdaq: AMZN) and Priceline (Nasdaq: PCLN) combine for about 24% of FDN's weight.

That trio represents three of PNQI's top-four holdings. Add in Baidu (Nasdaq: BIDU), China's largest Internet search provider, and you've got over 30% of PNQI's weight. The order of that quartet in PQNI is Priceline, Baidu, Amazon and Google.

What that situation leads us to is a familiar scenario: Just because two ETFs appear similar by name does not mean they will share a perfect performance correlation. In this case, Google accounts for 10.15% of FDN's weight, but that number drops to 7.9% in the PowerShares. Yes, this is important because shares of the largest U.S. Internet search provider are down this year.

On the other hand, Priceline has been no shrinking violet to Apple in terms of Nasdaq darlings in 2012. Actually, the Priceline Negotiator would be quite pleased because shares of his company have outperformed Apple year-to-date.

Think this isn't important as it pertains to FDN and PNQI? Think again. PNQI gives a 9.33% allocation to Priceline, but that number slides to 6.27% in FDN. Long story short, if one is wondering why PNQI's returns in 2012 have been roughly a third better than FDN's, the larger allocation to Priceline is certainly one reason.

Another reason is Baidu. Say what you want about Chinese stocks, but Baidu has surged almost 27.3% this year. At almost 8.4%, Baidu is PNQI's second-largest holding, but the stock is nowhere to be found. Clearly, PNQI is the winner of this week's showdown despite its inferior volume and this comparison serves as another reminder that applying absurd metrics to ETFs keeps investors away from small funds that can generate large returns.

Posted-In: Long Ideas News Sector ETFs Short Ideas Specialty ETFs Pre-Market Outlook Intraday Update After-Hours Center Best of Benzinga


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