It has been a decent though not spectacular for the major Internet exchange traded funds. For example, the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN) and the PowerShares NASDAQ Internet Portfolio (NasdaqGS: PNQI) are up an average of about 7%, but that lags the 8.6% returned by the NASDAQ-100.
PNQI tracks the largest and most liquid U.S.-listed companies engaged in internet-related businesses and employs a modified market cap-weighted indexing methodology based on the market cap ranking of the underling index securities.
With the holiday shopping season here, FDN could have some tailwinds as U.S. consumers increasingly turn to the convenience of online shopping over traditional brick and mortar retailers.
Online retail outlets or the e-commerce business seems to be flourishing. Amazon (NasdaqGS: AMZN) revealed strong quarterly growth in both earnings and revenues. Online bazaar eBay (NasdaqGS: EBAY) impressed investors after management raised guidance and reported revenue beats.
“This sector is (largely) about innovation over infrastructure…code over cement…and we think this has been and will continue to be a good recipe for investors…and the economy,” said RBC analyst Mark Mahaney in a recent note posted by Alex Eule of Barron’s.
Since 1999, online sales have grown at 20% compound annual growth rate while brick-and-mortar stores have actually seen sales dip. According to the US Department of Commerce’s latest quarterly retail e-commerce report, 7.5% of all U.S. retail sales are being done via e-commerce, so the industry has a lot of room to grow.
ETF investors can also take the sector-specific approach through the Amplify Online Retail ETF (NasdaqGM: IBUY), which targets the performance of the EQM Online Retail Index. IBUY is comprised of global companies that generate at least 70% of revenue from online or virtual sales.
“Mahaney sees 10 factors that could continue to drive Internet stocks higher, including the still-ongoing behavioral shift to mobile, the continued rise of cloud-based computing, the likelihood of more acquisitions, a surge in Internet-based video, and more transparent earnings reports,” according to Barron’s.
The analyst’s favorite Internet names are Amazon, Facebook (NASDAQ: FB) and Netflix (NASDAQ: NFLX). Those stocks combine for about a quarter of FDN’s weight. PNQI, the PowerShares Internet ETF, allocates nearly a quarter of its weight to those names as well.