If one were to ask the average person what kind of stocks have enriched investors the most, almost everyone would say internet stocks. The dot-com bubble was one of the most spectacular periods of wealth creation, if you sold at the proper moment. But for those who didn't, it was an unmitigated disaster. Back then, the mere presence of the word "internet" in a business plan would be enough to send a stock soaring, even if there were no profits or revenues in existence. But that is the past. The internet stocks of today are far different and, in our opinion, present just as compelling an opportunity.
The internet stocks of today are often mature but growing companies with strong business plans and excellent balance sheets, such as Google (GOG), Amazon (AMZN), and Priceline.com (PCLN). While each of these internet-focused companies leverage the greatest invention of modern times, they all benefit from one simple secular trend: The increased usage of the internet. It is a rising tide that will benefit almost all ships, and to catch that tide, we have invested in the PowerShares NASDAQ Internet Portfolio (PNQI).
This ETF contains 64 companies that all use the internet in some way, ranging from behemoths such as Amazon and Google to growing companies such as Ancestry.com (ACOM) and OpenTable (OPEN). Each of these companies depends on increasing use of the internet, which shows no signs of abating. In the United States, more and more of our lives and business is conducted over the internet, benefiting companies such as Amazon and Priceline.com. And in emerging markets, people are just discovering the power of the internet, which benefits companies like Baidu (BIDU) and Sina (SINA.)
What makes this ETF is that it leverages a trend that transcends geographic boundaries. This fund benefits from internet growth in America, in Latin America via companies such as MercadoLibre (MELI), and in China, via Baidu, Sina, Sohu (SOHU), and Yahoo! (YHOO), which is viewed by investors as a holding company for its Asian assets. The fact that the ETF's growth comes from both the developed world as well as the developing world makes it a great long-term holding. It is a proper balance that has served this fund well.
The Chinese companies in this fund are too well-established to be caught up in accounting frauds that have plagued small Chinese companies traded in the United States. You will not find a reverse merger company in this fund. Baidu, Sina, and Sohu may be affected by government regulation, but they will not be tainted by accounting scandals. As for the US companies in this ETF, they are led by Amazon, which constitutes over 10% of the fund's holdings. While this is larger than a more diversified ETF, PNQI is a concentrated bet on the internet sector, one that is dominated by Amazon. Blue-chip internet companies such as Google, Baidu, and eBay are also among the fund's largest holdings.
One of the most important aspects of an ETF is its expense ratio. PNQI has an expense ratio of 0.6% (see here) which may not be the smallest, but is certainly not onerously expensive. Either way, this fund has proven itself worthy, rising over 40% since its inception in June 2008. It has beaten both the NASDAQ and the S&P 500, which has posted negative returns since then.
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Investors looking for some growth in their portfolio would do well to consider the PowerShares NASDAQ Internet Portfolio. It is leveraging a trend that will continue no matter what kind of economic conditions the global economy is in. People may book less travel overall, but if they book more of it online, Priceline and Expedia (EXPE) do not care. This ETF has proven its worth, and we think it will continue to do so in the future.
Disclosure: I am long PNQI.