The technology sector has seen pretty choppy earnings reports come in, with some companies surging higher, and others falling by the wayside. Once reliable names (such as Microsoft) have been struggling though, suggesting that new leadership is at hand in the tech sector.
In particular, investors have seen a great deal of health in the internet, mobile, and broad social media markets. These corners of the tech world have posted solid earnings, almost universally, and have seen soaring stock prices as a result (see 2 Sector ETFs Surging This Earnings Season).
Plus, the outlook for many firms in this corner of the market is impressive, as a number of analysts have raised their estimates for companies in the sector. In fact, at time of writing, six of the seven Zacks Industries that are classified as being in the internet have Zacks Ranks in the top 50%, suggesting that good trading could be ahead for this space in the weeks ahead as well.
How to Play
While a look to individual securities could be a way to play this trend, investors may want to consider internet ETFs instead. This technique allows for diversification across a number of names, so that you can still play the trend without worrying about one company blowing up the entire return profile (see Create a Diversified Portfolio Using ETFs).
Below, we highlight three such internet ETFs which could make for interesting plays in this type of environment, especially if current trends continue in the space:
PowerShares NASDAQ Internet Portfolio (PNQI)
This ETF tracks the Nasdaq Internet Index a benchmark of about 80 companies in the internet segment of the economy. The product is somewhat popular with investors as it has about $100 million in assets, though volume is a little light at around 20,000 shares a day.
Internet and mobile makes up about 70% of the portfolio, while ‘internet retail’ 30% make up the rest of the fund. Large caps do account for roughly half the assets, while growth stocks account for roughly 75% of PNQI.
Top holdings include the surging Facebook (FB), priceline.com (PCLN), and Amazon.com (AMZN). The top holdings do account for an outsized portion of the assets though, as nearly 40% of the fund goes to the top five holdings alone (read 3 ETFs in Focus on Facebook’s Earnings Beat).
First Trust Dow Jones Internet Index (FDN)
This fund follows the Dow Jones Internet Index, a cap weighted benchmark of internet companies based in the U.S. market. FDN is pretty popular with investors, as over $1.3 billion is invested in the product while average daily volume is over 160,000 shares a day.
The Internet and mobile segment accounts for roughly half the portfolio, followed closely by internet retail at 23% of assets. The rest of the portfolio is in a variety of related industries including software, communications, among others.
Although the somewhat sluggish Google (GOOG) takes the top spot at 9.3%, the rest of the top five consists of better performing companies including AMZN, EBAY, PCLN, and FB. Concentration risk is an issue here too, as just 40 stocks are in this fund’s basket, though it does a decent job of spreading out capital among the component securities.
Global X Social Media Index ETF (SOCL)
The real winner this earnings season has arguably been in the social media market, making a fund like SOCL a top choice. The product follows a global benchmark of social media firms, though it hasn’t really caught on with investors as evidenced by low AUM and trading volume.
The product is nearly entirely focused on internet and mobile applications, though software and internet retail do sneak in as well. Mid and small caps are also well represented, while U.S. stocks account for just 50% of assets, leaving big chunks for China (30%), and Japan (8%).
In terms of top holdings four companies make up at least 10% of assets including Tencent Holdings, Facebook, Sina Corp (SINA), and LinkedIn (LNKD). The ETF only holds 28 stocks in total, so there is some concentrated risk, especially considering the tight sector focus of this fund (see Social Media ETF on Fire).
While the technology sector has had a rocky earnings season, there have been pockets of strong growth. This is particularly the case for the internet segment, as firms in this corner of the market have led the way higher, and have seen market leading performances over the past month.
Given some of the ongoing weaknesses in the old guard of technology, and the positive trends in the internet space, tilting towards companies in this segment could be the way to go. While there are a number of ways to accomplish this, a look to the aforementioned ETFs could be a diversified way to play the trend across a number of companies, that may be a lower risk approach to investing in this surging corner of the market.
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