A staple in the American investing diet for the past 50 years has been value investing. And for good reason, value investing has beaten out growth time and time again over the past century. Another investing maxim may be pertinent though: past results do not guarantee future returns.
Today the Wall Street Journal dissected the tech giants are tightening their grip on the internet economy. They are accomplishing this through billions and billions of dollars in investments on computer hardware and data centers that not just run their operations but also provide a place for start-ups to run theirs. The services and devices these companies provide are now critical to nearly all business operations – not to mention the consumer.
From the Journal, “Anyone building a brand, for example, can’t ignore Facebook’s highly engaged daily audience of 1 billion. Anyone starting a business needs to make sure they can be found on Google. Anyone with goods to sell wants Amazon to carry them. Any mobile app maker needs to be available in Apple Inc.’s or Google’s online stores. Any marketer with a video to promote needs to be on Google’s YouTube, while producers selling music, film, and television distribute their works through Apple’s iTunes or Amazon Video…Put another way, they own the digital equivalent of railroad lines just as the Web enters a new phase of growth.”
The strength of companies who derive their revenues from the internet is increasing all the time. First Trust Dow Jones Internet Index Fund (NYSEarca: FDN) seeks to capture returns from companies of just this type – at least 50% of the companies’ revenue must be generated from the internet – is crushing the other major ETFs in the tech sector. That’s saying something considering the white-hot nature of the sector.
FDN is up 24.5% YTD. Let’s compare that to the other major tech ETFs. The Technology Select Sector SPDR (NYSEarca: XLK) is up an impressive 8.27%, the iShares North American Tech-Software ETF (NYSEarca: IGV) is up 13.70%, and Vanguard’s Information Tech ETF (NYSEarca: VGT) is up 8.36%. All great returns – but just a stand-out year from FDN, right?
Not so much. The performance of these ETFs over the past four years has been 170%, 91.5%, 109.6%, and 89.59%, respectively.
Why? Well, to put it simply, the internet becomes more ubiquitous everyday and the companies that are deriving a majority of the revenues from it are growing right along with it. The time spent connected to the internet and devices among Americans rises every year and that time is subsequently monetized by innovative companies that enhance the internet in one way or another.
All of this ties back into those tech giants. Companies like LinkedIn, Netflix, TripAdvisor, Expedia, Groupon, and Pandora come along to service internet consumers but only on the backs of the infrastructure provided by the tech giants who own the internet economy. The former CEO of Symantec told the WSJ, “You are seeing ecosystems built around all of these companies now…There is a platform shift happening.”
So if internet-based companies are the strongest performing tech-sector and tech giants have control of their business infrastructure the trend of large-cap growth ETFs outpacing value may continue.
ETF investors can look to the iShares S&P 500 Growth ETF (NYSEarca: IVW) to capture large-cap growth stock exposure. The ETF is up 7.2% this year.