In the battle for tech stock supremacy, it’s been no contest as Internet companies that have delivered robust sales growth rates in recent years have handily outperformed traditional tech stocks that are entering a more mature phase of their life cycle. The Nasdaq Internet Index (QNET) has risen nearly 300 percent over the past five years, while the Nasdaq 100 has risen around 160 percent.
Yet when the Internet index slid roughly 20 percent in March and April, it was time for an investor gut-check. Ryan Issakainen, ETF strategist at First Trust Advisors LP, sees the pullback as a healthy pause in an otherwise uptrend and notes that Internet stocks have rebounded over the past six weeks. “There’s nothing I can see that portends any fundamental problems for these companies’ growth tracks,” he says.
That said, valuations in the space are lush, with many Net stocks trading for more than 30 times trailing earnings while old-line tech firms such as Microsoft and Oracle sport much lower multiples. High valuations mean that Internet stocks will always be vulnerable to a shift in the market mood. “Growth works as long as it works, but as we’ve seen, you’ll get a lot of volatility when investors grow anxious about the future,” says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.
After Internet stocks tumbled this spring, investors have given Internet-focused ETFs a second look. The First Trust Dow Jones Internet Index Fund (FDN) and the PowerShares NASDAQ Internet Portfolio (PNQI) track indexes that are maintained by Dow Jones, and the Nasdaq, respectively.
At first blush, they might seem quite similar: Both funds carry a 0.60 percent expense ratio; Google accounts for roughly 10 percent of both portfolios; and their respective top 10 holdings are comparable and account for at least 50 percent of the portfolios of both ETFs.
That last point could raise concerns about portfolio concentration, but Morningstar fund analyst Robert Goldsborough doesn’t see it that way, noting that the biggest players have had a habit of snapping up smaller rivals. “Buying growth is a predictable path for them, as it’s a way to sustain growth,” he says.
Dig a little deeper into these two ETFs and key differences emerge. While the First Trust fund has exposure to online brokers and Internet service providers, the PowerShares offering deploys roughly 15 percent of its assets in foreign (mostly Chinese) Internet stocks.