ETFs For Dot-Com Frenzy 2.0

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Well, things aren't like 1999 for a lot of reasons, but still, a slew of Internet companies have had wildly successful IPOs in recent months, including the social networking site LinkedIn and online radio service Pandora, inspiring comparisons to the dot-com bubble of the late 1990s.

LinkedIn's stock price more than doubled on its first day of trading, giving the company a valuation north of $8 billion. Meanwhile, Pandora, which has yet to turn a profit, priced at $16 in its IPO (up from the expected $7-$9 range), making the company worth roughly $2.5 billion before it even began trading.

Others are lining up, including online deal-of-the-day site Groupon, which filed for an IPO on June 2. Also, Zynga, the social network game developer, is rumored to be preparing an IPO filing soon and anticipation is building for potentially larger Internet IPOs on the horizon like Facebook and Twitter.

For investors who don't want to jump into the volatile world of trading dot-com IPOs but want exposure to the Internet sector, two ETFs are worth a look:the First Trust Dow Jones Internet Fund (NYSEArca:FDN) and the PowerShares Nasdaq Internet Portfolio (NasdaqGM:PNQI).

There's also the Internet HOLDRS (NYSEArca:HHH), but because it has been unmanaged since inception in 1999, it's more of a "survivors of the dot-com bubble" fund than anything else. Therefore, I won't spend any more time writing about HHH (the fund doesn't even have any exposure to Google).

Ticker

FDN

PNQI

Fund Name

First Trust Dow Jones Internet Fund

PowerShares Nasdaq Internet Portfolio

Index

Dow Jones Internet Composite Index

Nasdaq Internet Index

Inception

6/19/2006

6/12/2008

Expense Ratio

0.60%

0.60%

AUM ($M)

$690

$46

Number of Holdings

41

67

Top 5 Holdings

Google (9.5%), Amazon (7.9%), eBay (5.8%), Priceline (5%), Yahoo (4.7%)

Amazon (8.4%), eBay (8.1%), Priceline (8%), Google (7.9%), Baidu (7.9%)

Index Component Review

Quarterly

Annually

Weighting Scheme

Market cap (rebalanced quarterly)

Market cap (rebalanced quarterly)

Notes

Holds U.S. Companies Only

Holds U.S.-Listed Companie

Data as of 6/22/11

At first glance, both funds look similar. FDN and PNQI provide pure exposure to the Internet sector and cost 0.60 percent each. FDN has been around for about five years and has over $690 million in assets, while PNQI came to market about three years ago and is currently a $46 million fund.

Because they're both market-cap weighted, they also have heavy exposure to some of the largest Internet names, such as Google, Amazon and eBay (FDN caps a single-stock weighting to 10 percent, while PNQI caps a single holding to 8 percent).

However, there are material differences in the funds' methodologies that potential investors should know about.

The first major difference is that the Dow Jones Internet Composite Index, which FDN aims to track, reviews its index constituents quarterly, with changes taking effect on the third Friday of March, June, September and December. PNQI's underlying benchmark, the Nasdaq Internet Index, meanwhile reviews its constituents annually every March.

This means that companies like LinkedIn, Pandora and potentially Groupon (assuming these companies meet the index's other criteria), will be eligible for inclusion into FDN a lot sooner than PNQI.

Another important difference is that FDN only holds U.S. companies, while PNQI also holds depositary receipts of foreign companies traded on major U.S. exchanges.

This means that popular players from emerging markets such as Chinese search engine Baidu, Sina Corp. (which operates the micro-blogging site Weibo--China's equivalent to Twitter) and MercadoLibre (Latin America's equivalent to eBay) are included in PNQI but aren't eligible for FDN.

I'm actually surprised there aren't any international Internet ETFs on the market that also include companies only traded overseas, such as Tencent Holdings and Alibaba. Tencent is traded in Hong Kong and is actually the largest Chinese Internet company by market capitalization. And, the last time I checked, there's currently no ETF filing for a fund like this in the pipeline either.

So investors have options to weigh. FDN is the play if you want exposure in the near future to some of these recent U.S. Internet IPOs.

But many investors are also drawn to U.S.-listed Internet companies from emerging markets, especially China, for their enormous growth potential. If that's the case, then PNQI is the play. However, because the next index review isn't until next spring, PNQI, as I said, won't give you exposure to recent IPOs as quickly as FDN.

It'll be interesting to see if the current frenzy turns out to be dot-com boom 2.0 or dot-com bust 2.0. What makes these funds interesting is that they're both shortable, meaning that FDN and PNQI can provide a way to play the sector both on the long and short side of the trade.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2011 Index Publications LLC . All Rights Reserved.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: FDN , PNQI

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