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Internet ETFs Teach Old Lessons


It may not be a bubble on par with the bursting of the tech bubble seen at the start of this century, but Internet and social media stocks have had a rough go of things since the start of March.

Undoubtedly classified as growth and momentum plays, Internet and social media stocks and ETFs have been decimated as investors have eschewed high beta fare for diversified value ETFs along with sector funds tracking stodgy consumer staples and utilities equities. [Valuable Value ETFs]

Since the beginning of March, the Global X Social Media Index ETF (SOCL) is down 15.1% while the PowerShares NASDAQ Internet Portfolio (PNQI) and the First Trust Dow Jones Internet Index Fund (FDN) are each lower by 11%. [Social Media ETF Flirts With Bear Market]

While it remains to be seen whether this a mere bump in the road for high-flying Internet stocks or a the nascent stages of another tech bubble bursting, some market observers still reason for optimism with stocks such as Amazon (AMZN), Google (GOOG) and Priceline (PCLN).

“We see nothing on the horizon to slow down continued growth in Internet companies. And for investors who anticipate continued strength and believe that there’s still upside from here, an exchange-traded fund is a convenient way to tap into growth in the sector–and future IPO activity–while limiting single-stock risk,” said Morningstar analyst Robert Goldsborough in a recent research note.

Goldsborough notes that despite FDN’s niche focus, the ETF is actually highly correlated the Vanguard Information Technology (VGT) , a fund that focuses more on the likes of Apple (AAPL), Microsoft (MSFT) and IBM (IBM) than volatile Internet stocks. [Old Tech Props up These ETFs]

Amazon, Facebook (FB), eBay (EBAY) and Priceline combine for roughly a quarter of FDN’s weight. Amazon, Facebook and Google are wide moat firms, but are richly valued, according to Morningstar.

“Data also show that over the past five years, the performance of FDN is 92% correlated with the performance of the Nasdaq Composite Index,” Morningstar notes.

FDN is a Morningstar five-star rated fund and the ETF’s underlying index, the Dow Jones Internet Composite Index, has outperformed the S&P 500 and the S&P Composite 1500 Information Technology Index over the past year, three-, five- and 10-year periods, according to First Trust data.

First Trust Dow Jones Internet Index Fund


ETF Trends editorial team contribute to this post. Tom Lydon’s clients own shares of Apple, Amazon, Facebook and Google.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.