Investors seem to have gotten over the beating that Internet
stocks took from early March to early May, when the group
plummeted about 20%. Since then, these stocks have rallied nearly
17% and appear to be gaining momentum once again.
has done particularly well, jumping more than 30% from a
late-April low of $56 to the current price of almost $75.
Following a 15% plunge to $518 in early May,
has made up most of the ground it lost and now trades near
Other well-known Internet stocks have come back strongly, too,
including travel agent
, retail behemoth
and auction/e-commerce leader
Those looking to profit from the rebound have the daunting
task of deciding which stocks to choose. There are many good
ones, but it's hard to know which. The world of Internet
investing is still relatively new and often makes little sense,
with stock prices that may seem to based more on hype and
unreasonable expectations than solid fundamentals.
Basically, it's just too easy to make the wrong picks and get
burned, even if you do your homework. That's why in this case I
think it's best to use a diversified investment that allows you
to participate in the current resurgence and profit from internet
stocks over the long haul.
If you agree, there's an exchange-trade fund (
) I strongly suggest you consider.
The fund tracks the Nasdaq Internet Index, a benchmark
designed mainly to capture the performance of the largest, most
liquid Internet companies listed on the three main U.S. stock
exchanges. That's good because bigger tends to be safer. However,
this ETF also has substantial exposure to smaller companies and
leading foreign names, which I see as an advantage since smaller
and foreign stocks often deliver much faster growth.
During the past five years, the fund has crushed the market,
returning 26.9% a year versus 17.6% annually for the S&P 500.
PowerShares Nasdaq Internet ETF (NYSE:
has also far outperformed the broader technology sector and is in
the top 1% of its category.
Of the $329 million in fund assets, 83% is in U.S. stocks and
17% is in foreign stocks. In terms of distribution by market
capitalization, PNQI is 62% large-cap stocks, 23% mid-caps, 10%
small-caps, and 5% micro-caps. The portfolio has 98 holdings,
with the top five making up 45% of fund assets.
PowerShares NASDAQ Internet ETF: Top 10
Thanks to pricey holdings like Facebook, Amazon,
and others, the combined portfolio has valuation metrics that are
well above average. Its forward price-to-earnings (P/E) ratio,
for example, is almost twice that of the typical technology
PowerShares Nasdaq Internet ETF: Valuation
Despite these high valuations and a narrow focus, PNQI hasn't
been that much more risky than investments in the broader
technology sector. The fund has shown roughly 15% more volatility
than the average technology fund during the past three years and
only about 7% more over the past five years.
Also, despite its fantastic record, PNQI is still something of
a secret. While an asset base of $329 million may sound like a
lot, it's actually quite small by Wall Street standards. Many
ETFs and mutual funds are far larger, often managing tens of
billions of dollars.
Another sign investors are overlooking PNQI: At just under $69
a share, the fund is only trading at a 0.2% premium to net asset
). Very sought-after ETFs and closed-end funds can sometimes
command premiums of 5% to 10%, and occasionally even more.
At 0.6%, PNQI's expense ratio obviously isn't dirt cheap, but
it's still reasonable.
I'd be remiss if I didn't point out that PNQI doesn't hold the
popular microblogging site
just profiled by my colleague David Sterman
. The latest fund prospectus doesn't provide an explanation for
the omission, which is unfortunate but certainly not fatal, as
PNQI's long-term performance demonstrates.
Risks to Consider:
PNQI may not be that much riskier than other technology
funds, but it fluctuates a lot more than the overall stock
market. During the past three years, for example, the fund was
67% more volatile than the S&P 500.
Action to Take -->
For investors interested in the huge profit potential of Internet
stocks, the PowerShares Nasdaq Internet ETF is a top choice.
Through broad industry exposure, it avoids the pitfalls of trying
to identify the best individual players -- a difficult task
considering all the hype, unpredictability and nosebleed
valuations associated with internet stocks.
Because of its small asset base and tiny premium, I suspect
investors haven't yet fully embraced PNQI. So now is a good time
to buy, before the premium rises. What's more, Internet stocks
haven't fully recovered from their drubbing earlier this year and
may still offer attractive near-term profits. However, I like
PNQI more for its long-term upside as Internet use continues to
rise globally, especially in developing countries where much of
the population isn't yet online.
My colleague Andy Obermueller is also intrigued by the
Internet's seemingly limitless potential.
In his latest report, Andy identifies five other "game-changing"
trends with the potential to revolutionize the way we live our
lives -- and make early investors a killing. To learn more about
these emerging trends -- and the companies behind them -
follow this link.