“Good” does not adequately describe the performance of Internet and social media exchange traded funds in 2013.
No, “good” does not suffice when the three largest Internet and social media ETFs posted an average gain of almost 61%, nearly double that of the S&P 500. Returns like that generate plenty fans – and chasers – but not everyone on Wall Street is smitten with Internet stocks and the ETFs that hold those stocks.
For example, S&P Capital IQ is bullish on the fundamental outlooks for the Internet software and services and Internet retail sub-sectors. The research firm also holds a constructive view on the high-flying Chinese Internet space. [China ETFs for Exposure to Mobile Gaming]
Still, there are concerns. “However, valuations can be and often are a concern,” said S&P Capital IQ in a new research note. S&P Capital IQ has strong sell ratings on online music provider Pandora (NYSE: P) and Vistaprint (NasdaqGM: VPRT).
With a market value of almost $6.4 billion, Pandora is firmly entrenched in mid-cap territory, but only the Global X Social Media Index ETF (NasdaqGS: SOCL) offers a decent allocation to the stock with a weight of 5.1%.
S&P has an underweight rating on the $128.5 million SOCL, a tepid view considering the ETF jumped to a new all-time Wednesday, has a strong technical outlook and has fought off Twitter’s (NYSE: TWTR) recent decline with aplomb. [Social Media ETF Trumps Twitter]
China accounts for 29% of SOCL’s weight and that could serve as a catalyst for the ETF going forward. Investors looking for pure play exposure to Chinese Internet stocks can consider the KraneShares CSI China Internet Fund (NasdaqGS: KWEB). S&P also rates KWEB underweight, although the fund is up more than 35% since its Aug. 1, 2013 debut. [A Skeptical View of China Internet ETFs]
KWEB jumped 3.2% on volume that was seven times the daily average on Wednesday. The ETF’s top-10 holdings include Tencent, Baidu (NasdaqGM: BIDU) and Sina (NasdaqGM: SINA).
The PowerShares NASDAQ Internet Portfolio (NasdaqGS: PNQI), one of 2013’s 10 best non-leveraged ETFs, also drew an underweight rating from S&P Capital IQ. The research firm said of its 10 rating inputs, just one, technical, turned up positive on PNQI.
However, if Internet stocks continue on their momentum-laden paths, PNQI should again be a leader as it is home to some of the industry’s biggest names. Nearly a third of the ETF’s combined weight goes to Facebook (NasdaqGM: FB), Google (NasdaqGM: GOOG), Amazon (NasdaqGM: AMZN) and Priceline (NasdaqGM: PCLN).
The one Internet ETF S&P Capital is remotely positive on is the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN). With $1.94 billion in assets, FDN is by far the largest Internet ETF. FDN’s lineup has some duplication with PNQI’s as Google, Amazon, Facebook and Priceline combine for over 28% of the former’s weight.
FDN also features Salesforce.com (NYSE: CRM) among its top-10 holdings. S&P Capital IQ has a strong sell rating on that stock, but rates FDN marketweight. The research firm said it does not have strong buy or buy ratings on any of FDN’s top-10 holdings. [ETFs for 2013’s Top Tech Stocks]
First Trust Dow Jones Internet Index Fund
Tom Lydon’s clients own shares of Amazon, Facebook and Google.