Technology is the most powerful industry influencing the overall
health of the U.S. economy. The ongoing boom in this important
sector is driven by Internet services, in particular mobile
Internet, and it doesn't appear to be slowing down anytime
As the digital age dawns on us, the demand for mobile Internet
is rising rapidly with the growing popularity of Intranet and
Virtual Private Networks (VPNs), online video streaming, video
conferencing, IPTV, managed telepresence, cloud computing and
network security (read:
Inside The Cloud Computing ETF (SKYY)
Over the last few years, Internet has taken the most vital place
in a technology-driven world, surging more than double each year.
The growing demand for Internet connected devices such as
smartphones, tablets, notebooks, iPhones, and laptops are boosting
data traffic. The global mobile data traffic is expected to grow
eighteen folds by 2016, as per a recent study from the networking
company Cisco Systems (CSCO).
Thanks to modern technology and recent developments, investors
have begun to show interest in the Internet sector. For investors
seeking to play this space, our research suggests that the
PowerShares NASDAQ Internet Portfolio Fund
) could be an interesting choice. The fund currently has a Zacks #2
Rank (Buy), and thus we expect it to outperform its peers in the
high-risk tolerance bracket.
PNQI: A Solid Choice in the Tech Space
Launched in June 2008, the fund has emerged as a strong winner
in the tech space, producing more than 26% of an annualized return
over the past three years. The product seeks to match the price and
yield of the NASDAQ Internet Index, before fees and expenses.
With holdings of 69 securities, PNQI includes the largest and
most liquid U.S.-listed companies engaged in Internet-related
businesses that are listed on one of the major U.S. stock exchanges
Three Great Tech ETFs That Avoid Apple
The fund allocates about half of the assets to large cap firms,
which tend to be more stable and less volatile than the mid and
small counterparts. Mid and small caps accounted for the rest of
the basket. More than two-thirds of the fund's portfolio has a
growth style, which means the securities in the fund target the
growing segment of the market.
The growth fund arguably offers above-average revenue and
earnings growth with high price-to-equity (P/E) and price-to-book
(P/B) ratios but yield lower than the value and blend counterparts.
The ETF has a P/E ratio of 27.23 and P/B ratio of 3.50.
Growth funds also increase more than the other funds in bull
markets, although they also fall more drastically in bearish times.
Since many are looking for a modest recovery, growth funds seem
like a decent choice for those expecting a return to market health
in the fourth quarter (read:
Five Best Performing ETFs (So Far) in 2012
PNQI has been able to manage assets of $49.6 million, returning
more than 15% year-to-date (as of August 31). In fact, this return
is higher than the returns from the S&P 500 by 350 bps.
The product is often considered a high momentum (the change in
the fund's price over the past three months) ETF with value closer
to 109, suggesting that it will continue to move higher relative to
the other counterparts (read:
Do You Need a High Momentum ETF?
Further, the ETF has very little correlation with the S&P
500, as indicated by R-Squared of 29.06%. It is constantly
outperforming its benchmark index, as depicted by positive
PNQI: A focused product
The ETF is expensive in the technology space, charging 60 bps in
annual fees from investors. In fact, its expense ratio is more than
triple the Technology Select Sector SPDR ETF (
), which is the most popular and the low cost choice in the space
Three Technology ETFs Outperforming XLK
Though PNQI contains liquid securities in its portfolio, it
trades in low volumes of 13,000 shares per day. This suggests that
an extra cost might be involved in the form of bid/ask spread at
the time of trading.
The fund is not widely spread across individual securities, as
it puts around 62% of its assets in the top 10 holdings (read:
Create a Diversified Portfolio Using ETFs
). eBay, Google and Amazon hold the top three positions in the
basket and combined make up for 27% share. This suggests that
company-specific risk is high in the case of PNQI and the top 10
holdings dominate the returns of the fund.
From a sector perspective, information technology takes the top
spot in the basket with 74% share, followed by consumer
discretionary (25%), telecommunication services (0.6%) and
financials (0.5%). The product has a higher concentration risk of
roughly 20%, indicating its heavy reliance on a particular sector
In addition, the fund is widely exposed to the U.S. (81%)
followed by Chile (13%), the Netherlands (3%), Argentina (2%) and
Canada (2%). This suggests that not only is the fund a potential
outperformer in the tech space, but it is also a good pick for
investors seeking to zero in on a high growth segment while
concentrating exposure on some of the safest nations around the
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box, or asset class. Our proprietary methodology also takes into
account the risk preferences of investors. ETFs are ranked on a
scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive
one of three risk ratings; Low, Medium, or High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of risk.
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PWRSH-ND INTRNT (PNQI): ETF Research Reports
SPDR-TECH SELS (XLK): ETF Research Reports
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