Scalper1 News
Summary As of this writing, the S&P 500 Index is down for the year. But there is one sector of the market that has defied the market selloff: Internet stocks. The First Trust Dow Jones Internet Index ETF is one of the best ways to tap into the Internet sector. Unlike the dot-com bubble of the late-1990s, today’s Internet stocks are profitable and worth a careful look by investors seeking to capitalize on this high growth sector. Until recently, the U.S. market was going up and long investors were making money. Concerns about China and a Federal Reserve rate hike were in the air but nothing to worry about too much. Now, all of a sudden, panic has taken hold in China, which has dragged down global markets, including the United States. But one part of the market has stayed aloft: Internet stocks. The First Trust Dow Jones Internet Index ETF (NYSEARCA: FDN ) is a good way to invest in a diversified basket of these stocks. Resisting the global selloff Worries about slowing growth in China and a looming rate hike by the Federal Reserve have led to a broad-based selloff in the financial markets. Practically everything has gone down this year, except for short and intermediate-term U.S. Treasury bonds. One exception has been Internet stocks. The following graph shows the relative performance of the U.S. market, as measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), and the Internet sector measured by FDN, as of this writing: Source: YCharts Back in the late 1990s, the dot-com boom created a stock market bubble. Venture capitalists were throwing money at any Internet-related start-up with dot-com at the end of its name. Tech investors watched in awe as their investments soared and the tech-heavy NASDAQ Index breached 5,000. Eventually, the dot-com bubble burst. The NASDAQ crashed in the early 2000s. Tech investors learned the hard way about risk. It wasn’t until earlier this year – 15 years later – that the NASDAQ reached 5,000 again . This time, it really is different Today, many dot-com companies have become household names, including Amazon (NASDAQ: AMZN ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), and Facebook (NASDAQ: FB ). Moreover, as the Internet sector has grown into a more mature industry, dot-com stocks have become profitable. Since 2006, FDN has handily outperformed the U.S. market, as shown in the following graph: Source: YCharts The proliferation of mobile Internet-connected devices such as smartphones has created a new consumer culture oriented around technology. People not only communicate but also conduct commercial transactions using smartphones and other mobile devices. Some young people I know have never sent a letter through the U.S. mail. The First Trust Dow Jones Internet Index ETF FDN offers exposure to some of the biggest and best Internet stocks in the marketplace. Rather than investing in individual Internet stocks with high idiosyncratic risk, FDN provides a more diversified basket of stocks, which helps reduce risk. Currently, FDN holds 43 companies. The ten largest holdings are as follows: Google Amazon.com Facebook Priceline Group (NASDAQ: PCLN ) Netflix (NASDAQ: NFLX ) Salesforce.com (NYSE: CRM ) PayPal Holdings (NASDAQ: PYPL ) Yahoo! (NASDAQ: YHOO ) LinkedIn Corp (NYSE: LNKD ) Equinix (NASDAQ: EQIX ) The Internet sector is somewhat obscured by Wall Street classifications that do not break out dot-com stocks as a separate, specialized sector. The underlying index used as the basis for FDN requires that companies in the index derive at least 50% of their revenue from the Internet. The companies in FDN include Internet search engines, e-commerce businesses, Web infrastructure companies, and cloud computing providers. FDN is by far the largest Internet ETF of its kind with over $3 billion in assets. This provides FDN investors with high liquidity when buying or selling shares. The next closest competitor is the PowerShares NASDAQ Internet Portfolio ETF (NASDAQ: PNQI ) with only an estimated $200 million in assets. PNQI holds 95 companies compared to FDN’s 43. In addition, PNQI holds foreign Internet companies such as Baidu (NASDAQ: BIDU ), while FDN does not. FDN carries a slightly lower expense ratio of 0.54% of assets compared to PNQI at 0.60%. Risk analysis The fact that FDN has stayed aloft despite the market downturn provides some evidence that it could help to diversify your portfolio. The growth potential of these stocks is so great that FDN has resisted a global market correction. On the other hand, Internet stocks are more volatile than the market as a whole. Therefore, rather than using FDN as a core holding, investors should consider FDN as a way to overweight the technology portion of a diversified portfolio. Price-to-earnings valuations in the Internet sector are high right now at about 22 times earnings compared to the S&P 500 at about 19 times earnings. While valuations are nowhere near bubble territory, FDN is richly valued. The bottom line Internet stocks have come a long way since the dot-com bubble of the late 1990s. Today, Internet stocks are profitable and mainstream, so much so that these stocks have resisted the recent market turmoil. Investors seeking exposure to this specialized part of the financial markets may wish to consider buying shares of the First Trust Dow Jones Internet Index ETF. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News