Internet ETFs: A Rising Rates Sanctuary

Ten-year Treasury yields closed at a new 52-week high of 2.98% Thursday, but the concept of rising yields on U.S. government bonds was not born yesterday. Since May 22, the day when tapering became part of the everyday financial markets conversation, 10-year Treasury yields have surged nearly 46%.

The subsequent negative fallout has been predictable for select asset classes. Obviously, rising rates are destructive for Treasuries and the longer the duration, the greater the pain. Other income-generating asset classes and sectors have been crimped as well. Exchange traded funds offering exposure to MLPs, REITs and favored dividend sectors like consumer staples, utilities and telecom have been stung by higher Treasury yields. [With Fed Meeting Looming, Fears of Sep-taper Rise]

Not all sectors are succumbing to rising rates blues. Biotechnology funds stand out as examples of ETFs that are weathering the surging Treasury yield storm with aplomb. Another great example is Internet ETFs and that much was proven on Thursday. Yesterday, fewer than 10 ETFs hit new all-time highs, but two were Internet plays: The Global X Social Media Index ETF (NasdaqGS: SOCL) and the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN). [Facebook Surge Powers Social Media ETF]

The PowerShares NASDAQ Internet Portfolio (NasdaqGS: PNQI) missed out on a new all-time by a matter of pennies, but the point is clear: Internet ETFs are not just surviving higher Treasury yields. These ETFs are thriving. SOCL has surged 29.3% over the past 90 days while PNQI is up about 21.5% over the same time. FDN is the “laggard” of the group, up nearly 15% over that time.

It actually is not that hard to explain why Internet stocks and ETFs are performing well even as rates rise. Companies such as Amazon (NasdaqGM: AMZN) and Google (NasdaqGM: GOOG) have strong balance sheets. Since they are not prolific issuers of debt, they are not squeezed by rising rates they way capital-intensive utilities are. Those stocks combine for 14.2% of PNQI’s weight.

Second, companies like Facebook (NasdaqGM: FB) and LinkedIn (NYSE: LNKD) are young enough that they have not needed to access debt markets in significant fashion. It sounds simple and it is, but Facebook and LinkedIn’s status as newer publicly traded companies is working in their favor as rates rise. Those stocks combine for over 22% of SOCL. Facebook is the top holding in PNQI and SOCL and the fifth-largest holding in FDN.