Internet ETF Leadership Rooted in Realism

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Includes: FDN, PXQ
by: Gary Gordon

Dot.com mania in the late 90s is yesterday's story. In fact, it's more than a decade old already... so why bring it up?

For one thing, dot-com hysteria represents the first in a series of bubbles that occurred since Greenspan uttered his 1996 words, "irrational exuberance." We witnessed it in the Internet boom and 2000-2002 bust. We observed it again in the real estate mania and subsequent collapse. We watched still more irrational euphoria in the oil price explosion and ensuing breakdown.

Secondly, all of these events occurred after the repeal of the 66-year old Glass-Steagall Act in 1999; that is, after President Clinton signed the legislation into law, many of the the problems that trampled the 1930s investor came right back to haunt the 2000s investor.

For instance, after 1999, the same banks and institutions lending money were now permitted to be involved in investing as well. Not only did the banks propel various parts of the markets higher, their lending losses threatened the integrity of their actual existence as banks. The repeal of Glass-Steagall even turned banks that were supposed to be engaged in the management of depositor risk into less sensible companies operating in speculative areas, from derivatives to commodities to stocks.

Nevertheless, lots of things have change since 1999. Back then, many Internet companies traded at P/E ratios of 50, 60, or 80. In fact, many dot-com companies didn't even have positive earnings growth to justify the exorbitant prices they were fetching. It was the "New Economy."

In the New, New Deal economy of 2009, however, the Internet companies in the First Trust Internet Index Fund (NYSEARCA:FDN) collectively earn quite a bit of real money. The collective P/E is currently at 17, which is slightly above the S&P 500 historical average of 16. That said, it is rather low for info-tech names that include Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), e-Bay (NASDAQ:EBAY), Juniper (NYSE:JNPR) and Salesforce.com (NYSE:CRM).

Other valuation metrics look to be exceptionally low. Price-to-book is only 1.7, while the all important growth standard, price-to-sales, is just 1.4.

Technical analysts have to give First Trust Internet Index Fund (FDN) some attention as well. As of the market's close, 4/9/09, FDN climbed above its long-term trnedline, the 200-day moving average.

Fdn internet sma 200

Although the First Trust Internet Index Fund (FDN) is more volatile in price movement than the S&P 500, FDN's .75 correlation to the S&P benchmark is lower than most stock ETFs. It follows that for the stock component of one's portfolio, you're able to get some diversification by looking this direction.

There's one other way to look at the Internet... and it may or may not be more flexible than the above-mentioned FDN. That's because First Trust Internet Index Fund (FDN) tracks the Dow Jones Internet Index and is market-cap weighted.

In contrast, the Powershares Dynamic Networking Fund (NYSE:PXQ) tracks a "dynamic" index that evaluates companies based on proprietary "merit" criteria, including fundamental growth and stock valuation. Consequently, the holdings that have the largest weighting will be those deemed most worthy by the "dynamic" powers that be, and not by market capitalization.

Not surprisingly, then, the Powershares Dynamic Networking Fund (PXQ) tends to have a greater focus on mid-sized info tech providers. Yes, you'll still get your Cisco and Juniper, but you'll also get a helping of VMWare and McAfee.

The Powershares Dynamic Networking Fund (PXQ) is up an astonishing 12.3% in 2009. Moreover, it too has climbed above its 200-day trendline.

Pxq networking sma 200

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.