Investing in Internet companies is attractive considering their excellent growth potential. The use of the Internet is growing rapidly as it enables convenient, quick, and secure connectivity between consumers and suppliers. Internet usage is gaining traction not only in the developed countries but also in emerging economies like China, which now claims to have the largest base of Internet users.
Internet funds have performed well in the past two years. First Trust Internet ETF (FDN) for example has gained 145% that is more than three times of the S&P 500’s 45% gain.
Although Internet funds are viewed as sector funds, in reality they offer exposure to companies spanning a variety of sectors.
Internet companies fall in two broad categories, those that enable the Internet to generate profits and those that use the Internet to generate profits.
Internet enablers typically fall within the information technology sector. These include companies like Cisco Systems (CSCO) and content delivery networks like Akamai Technologies (AKAM).
Internet users often hail from other sectors like consumer discretionary, financial services, or health care. Examples of such companies include:
* Amazon.com (AMZN), the largest online retailer selling goods from books to shoes
* Netflix (NFLX), an online provider of movie rental subscription services
* priceline.com (PCLN), a company offering travel-related services online
* TD AMERITRADE (AMTD), an online securities brokerage and financial services firm
* WebMD Health (WBMD), an online health care information provider for consumers and medical professionals
Additionally, there are behemoths like Google (GOOG) and Microsoft (MSFT) that enable the Internet with search capability they provide and connect customers to businesses through their advertisements networks.
There are three families offering exchange-traded entities for investing in the Internet: First Trust, Invesco PowerShares and Merrill Lynch.
First Trust Dow Jones Internet ETF (FDN)
FDN seeks to track the price and yield performance of about 40 Internet companies included in the Dow Jones Internet Index. The fund invests in companies that derive at least 50% of their revenue online. The top 10 holdings include well-known names like Google, Amazon.com, and eBay (EBAY). The fund is relatively concentrated with the top 10 holdings accounting for over 50% of the portfolio’s assets.
PowerShares Nasdaq Internet Portfolio (PNQI)
PNQI tracks the price performance and yield of over 50 Internet companies listed in the Nasdaq Internet Index. The top 10 holdings include Google, Yahoo! (YHOO) and Amazon.com. This fund is also concentrated with the top 10 holdings accounting for nearly 60% of the portfolio’s assets. An interesting feature of this fund is that Chinese companies, Baidu (BIDU), SINA (SINA), and Sohu.com (SOHU) represent about 12% of the portfolio assets.
