Technology is a bright spot for the market, unless you’re a foreign-focused exchange-traded fund.
The Technology Select Sector SDPR Fund (XLK) is up 12.5 percent on the year, handily beating the 4.6 percent return on the SDPR S&P 500 Trust (SPY). But XLK has nothing on the three U.S. internet-focused ETFs. The SPDR S&P Internet ETF (XWEB) is up 33 percent year-to-date, the First Trust Dow Jones Internet Index Fund (FDN) is up 30.3 percent and the Invesco NASDAQ Internet ETF (PNQI) has gained 23.8 percent.
But this year’s outperformance is strictly a U.S. phenomenon. Two of the biggest ex-U.S. internet ETFs, the KraneShares CSI China Internet (KWEB) and The Emerging Markets Internet & Ecommerce ETF (EMQQ), are up 0.20 percent and down 3.94 percent, respectively.
There’s a simple answer to at least part of the drag, and that’s the outperformance of the U.S. market versus Europe, Asia and the emerging markets, says Gavin Maguire, senior equity analyst at Briefing.com. A stronger U.S. dollar is also weighing on ex-U.S. markets.
Chinese stocks in particular are dinged by the growing trade war barbs, and the overall negative sentiment has hit the region’s technology sector. Diving into internet stocks specifically, Scott Kessler, director of equity research at CFRA who covers technology, says in recent months “there's been kind of a flattening out of the outperformance trajectory” for Chinese internet companies.
Two Chinese internet software and services companies he covers, Alibaba and Baidu, overall are “great” companies and hugely popular in China, he says, but there are questions about how they might perform outside the country. Their growth-plan executions have been inconsistent and that’s one of the reasons why they’re trading at a discount to their U.S. counterparts, he says.
U.S. tech behemoths have propelled gains in U.S. internet ETFs. Carin Pai, director of equity management at Fiduciary Trust Company International, says internet companies Netflix and Amazon.com in particular have supported these ETFs.
XWEB includes Amazon and Facebook in its portfolio, but they don’t crack the top 10. Instead, XWEB’s top holdings are Etsy at 1.9 percent, Web.com Group at 1.7 percent and Netflix at 1.6 percent. XWEB’s expense ratio is 35 basis points and it has $45 million in assets under management.
FDN’s top three holdings are Amazon at 10 percent, Facebook at 8.7 percent and Netflix at 6.6 percent. FDN’s expense ratio is 53 basis points and it has $9.3 billion in AUM.
PNQI’s three top holdings are Netflix at 9 percent, Amazon at 8 percent and Alphabet at 7.9 percent. Its expense ratio is 60 basis points and it has $708.9 million in AUM. One thing to consider with PNQI is that while 82 percent of its portfolio is in U.S.-based internet companies, it holds a few international companies listed on the NASDAQ, such as China’s Baidu. China comprises 16 percent of the portfolio’s country weighting.