A couple of examples of this already happening include Facebook trying to launch its own cryptocurrency as well as Amazon developing its own machine learning forecasting tool.
However, the technology sector can be quite broad. It can include social media, video streaming and blockchain technology for which there are unique thematic ETFs available which offer exposure to these niche areas.
None of this would be made possible without the use of the internet. You wouldn't be able to read this article without the assistance of the internet so how can investors monetise this?
While it may be a niche area to invest in, the ETFs do have their difference which we will be comparing like for like.
|ETF||First Trust Dow Jones Internet ETF (FDN)||Invesco Nasdaq Internet ETF (PNQI)|
|Benchmark||Dow Jones Internet Composite Index||NASDAQ Internet Index|
FDN tracks the Dow Jones Internet Composite Index, comprised of the 40 largest and most liquid US stocks within the internet industry. To be eligible for the index, the company must derive at least half of its revenue from the internet.
A number of its largest holdings appear in the S&P 500 such as Amazon, Facebook and Netflix which make up 9.9%, 8.3% and 4.8% of the fund, respectively.
Invesco’s PNQI track the NASDAQ Internet Index is comprised of 84 global stocks which engage in internet-related businesses. This includes internet software, access providers, search engines and web hosting.
Similar to FDN, PNQI’s holdings include US giants Amazon, Facebook, Netflix and Google as well Alibaba which is the missing letter from the tech giant acronym FAANGs. Alibaba is the largest holding and makes up 10.6% of the fund. Other top holdings include Baidu (3.2%) and Argentine e-commerce platform MercadoLibre (3.3%).
PNQI has more than twice as many holdings as FDN, however, its top 10 holdings make up 58.5% of the funds whereas FDN’s top 10 holdings only make up 54%. This shows the high concentration to PNQI’s top holdings.
Cost and tradability
The older FDN comes with a management fee of 0.54% which is cheaper than PNQI’s fee of 0.6%. Invesco’s higher fees will be a result of the fund including international stocks.
FDN came to Europe in July 2018 and is only 1 basis point more expensive than its US counterpart following it being domiciled in Ireland which has a tax benefit with US stocks.
Both FDN and PNQI have a significantly low premium. At the time of writing this, FDN was trading at a discount of 2bps and an average annual premium of 0%. PNQI had the opposite with a current trading premium of 0% and an average annual premium of 0.02%.
Trading at a slight discount means the ETFs will be cheaper to buy, however current investors holding the funds will be taking a loss on its absolute returns.
Technology has been one of the best performing sectors in 2019, but due to the two funds differing in geography exposures, their performances differ significantly across all time frames. So far this year, PNQI has produced the greatest returns with 23.6%, ahead of FDN’s 18.1%.
PNQI also outperformed FDN over the last 12-months. PNQI has risen 1.1%, however, FDN has a negative performance for the period with -1.3% having been significantly impacted by the volatility which hit in Q4 2018.
FDN has performed better for the longer duration having three and five year returns of 20.6% and 17.5%, respectively, in comparison with PNQI’s 17.3% and 14.1%.
The internet is going to be a key driver for the growth of the technology industry but the big questions is which geography is going to lead it, the US or Asia.
A significant portion of these stocks most likely appear an investor’s portfolios already due to their existence in the S&P 500 and other leading indices. Therefore FDN could leave you being overexposed to both the US and FANGS.
PNQI, albeit 5bps more expensive, is more diverse and has the recent performance to support it. To be able to include Asian stocks which have been impacted by the trade war between the US and China and outperform over the last 12 months an ETF that is solely made up of US stocks is noteworthy.
While PNQI is more diversified, it does come with the same issue as FDN that it includes large cap Asian stocks which investors will likely already have in their portfolios so could produce the risk of being overexposed unless adjusted accordingly.
As there is no clear leader between the US and Asia as to who will dominate the technology or internet sector over the next decade, Invesco’s slightly more expensive but more diverse PNQI will be the safer option with negligible sacrifice on absolute returns.