Tag Archives: nasdaq

Dot-Com Stocks: This Time, It Really Is Different

Summary As of this writing, the S&P 500 Index is down for the year. But there is one sector of the market that has defied the market selloff: Internet stocks. The First Trust Dow Jones Internet Index ETF is one of the best ways to tap into the Internet sector. Unlike the dot-com bubble of the late-1990s, today’s Internet stocks are profitable and worth a careful look by investors seeking to capitalize on this high growth sector. Until recently, the U.S. market was going up and long investors were making money. Concerns about China and a Federal Reserve rate hike were in the air but nothing to worry about too much. Now, all of a sudden, panic has taken hold in China, which has dragged down global markets, including the United States. But one part of the market has stayed aloft: Internet stocks. The First Trust Dow Jones Internet Index ETF (NYSEARCA: FDN ) is a good way to invest in a diversified basket of these stocks. Resisting the global selloff Worries about slowing growth in China and a looming rate hike by the Federal Reserve have led to a broad-based selloff in the financial markets. Practically everything has gone down this year, except for short and intermediate-term U.S. Treasury bonds. One exception has been Internet stocks. The following graph shows the relative performance of the U.S. market, as measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), and the Internet sector measured by FDN, as of this writing: Source: YCharts Back in the late 1990s, the dot-com boom created a stock market bubble. Venture capitalists were throwing money at any Internet-related start-up with dot-com at the end of its name. Tech investors watched in awe as their investments soared and the tech-heavy NASDAQ Index breached 5,000. Eventually, the dot-com bubble burst. The NASDAQ crashed in the early 2000s. Tech investors learned the hard way about risk. It wasn’t until earlier this year – 15 years later – that the NASDAQ reached 5,000 again . This time, it really is different Today, many dot-com companies have become household names, including Amazon (NASDAQ: AMZN ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), and Facebook (NASDAQ: FB ). Moreover, as the Internet sector has grown into a more mature industry, dot-com stocks have become profitable. Since 2006, FDN has handily outperformed the U.S. market, as shown in the following graph: Source: YCharts The proliferation of mobile Internet-connected devices such as smartphones has created a new consumer culture oriented around technology. People not only communicate but also conduct commercial transactions using smartphones and other mobile devices. Some young people I know have never sent a letter through the U.S. mail. The First Trust Dow Jones Internet Index ETF FDN offers exposure to some of the biggest and best Internet stocks in the marketplace. Rather than investing in individual Internet stocks with high idiosyncratic risk, FDN provides a more diversified basket of stocks, which helps reduce risk. Currently, FDN holds 43 companies. The ten largest holdings are as follows: Google Amazon.com Facebook Priceline Group (NASDAQ: PCLN ) Netflix (NASDAQ: NFLX ) Salesforce.com (NYSE: CRM ) PayPal Holdings (NASDAQ: PYPL ) Yahoo! (NASDAQ: YHOO ) LinkedIn Corp (NYSE: LNKD ) Equinix (NASDAQ: EQIX ) The Internet sector is somewhat obscured by Wall Street classifications that do not break out dot-com stocks as a separate, specialized sector. The underlying index used as the basis for FDN requires that companies in the index derive at least 50% of their revenue from the Internet. The companies in FDN include Internet search engines, e-commerce businesses, Web infrastructure companies, and cloud computing providers. FDN is by far the largest Internet ETF of its kind with over $3 billion in assets. This provides FDN investors with high liquidity when buying or selling shares. The next closest competitor is the PowerShares NASDAQ Internet Portfolio ETF (NASDAQ: PNQI ) with only an estimated $200 million in assets. PNQI holds 95 companies compared to FDN’s 43. In addition, PNQI holds foreign Internet companies such as Baidu (NASDAQ: BIDU ), while FDN does not. FDN carries a slightly lower expense ratio of 0.54% of assets compared to PNQI at 0.60%. Risk analysis The fact that FDN has stayed aloft despite the market downturn provides some evidence that it could help to diversify your portfolio. The growth potential of these stocks is so great that FDN has resisted a global market correction. On the other hand, Internet stocks are more volatile than the market as a whole. Therefore, rather than using FDN as a core holding, investors should consider FDN as a way to overweight the technology portion of a diversified portfolio. Price-to-earnings valuations in the Internet sector are high right now at about 22 times earnings compared to the S&P 500 at about 19 times earnings. While valuations are nowhere near bubble territory, FDN is richly valued. The bottom line Internet stocks have come a long way since the dot-com bubble of the late 1990s. Today, Internet stocks are profitable and mainstream, so much so that these stocks have resisted the recent market turmoil. Investors seeking exposure to this specialized part of the financial markets may wish to consider buying shares of the First Trust Dow Jones Internet Index ETF. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Microsoft, Dell & HP Partner to Sell Surface to Enterprises

Microsoft CorporationMSFT recently collaborated with Dell and Hewlett Packard HPQ to sell its Surface Pro tablet to enterprises. Details of the Partnership In a blog post on Tuesday, Microsoft stated that starting October, Dell’s sales team will sell Surface

Is It Safe To Return To Emerging Market Investments?

Emerging market investments across asset classes have suffered a brutal combination of collapsing commodity prices and a strong US dollar this year. Is the bottom near, and where might investors look for bright spots? 2015 has been a lackluster year for US and European markets, but their performance is still leagues better than what emerging market investors have struggled through. The MSCI Emerging Markets Index is down over 17% year to date, and emerging market bonds are down nearly 2% so far in 2015. Most tellingly, emerging market currencies have been the worst hit, down more than 20% over the last twelve months, which has in part fueled the collapse of other emerging market asset classes. Brazil’s real, for instance, is down 30% year to date. (click to enlarge) Source: Bloomberg and Global Risk Insights The causes for the destructive trend are not difficult to spot: commodities (led by oil) have fallen to multi-year lows, investors have hit the panic button on Chinese growth, and the US Federal Reserve has signaled an impending rate hike. As if that tally of obstacles was not enough, two of the major attractions to emerging market investments have been diminished as of late: high growth and low correlation with developed markets. The euphoria-fueled growth rates of emerging markets, especially those of the BRICS countries, are gone. The optimism of investors flooding into these markets for newly middle class consumers and market-oriented structural reforms may have instead been a thin veneer over high commodity prices piqued by Chinese infrastructure spending. (click to enlarge) Source: Bloomberg and Global Risk Insights While this growth was seen as a secular trend that could act as a hedge against the cyclicality of developed markets – particularly surrounding the financial crisis – the focus on zero-interest rate policies and quantitative easing by the US Federal Reserve, Bank of England, and European Central Bank have brought investment cycles of developed and emerging markets in line with one another. 2013 and 2014’s taper tantrums are the most memorable examples of this: investors walking back down the risk ladder in anticipation of Fed tightening are moving away from emerging markets as well as developed market equities. When the sell-off slows, emerging markets will once again be an attractive opportunity The trends that have led to the emerging market sell-off are not permanent, and when these dark clouds lift, more investors will see promising returns. More importantly, some regions have been unfairly maligned during the sell-off. So is the time right for investors looking to diversify, and if so, where do they turn? Of course, consistently timing the market’s peaks and troughs is a fool’s errand , but there is one date on the horizon that will keep capital flows in emerging markets in a tenuous place: the Fed’s first rate hike . Once that has passed, especially given the Fed’s guidance that the rate hike cycle will be slow and designed to sustain financial market stability as much as possible, the brighter markets that have been unfairly grouped with less promising markets should begin to shine again. There are some reasons to believe the future is looking brighter across emerging market regions and asset classes. Currency market observers are beginning to believe that some emerging market currencies are becoming fairly valued again, after being overvalued throughout most of the QE era. Those that are still unattractive are those with enough dependence on China to spook investors. As momentum falls away from these trades, earnings and yields (in dollar-terms) will stabilize. Speaking of yields, the transition to local currency denominated debt in emerging markets has cleared up much of the uncertainty that fueled the 1997 Asian financial crisis: unwise pegs to the US dollar and dollar-denominated debt. Even as investors dump emerging market debt as yields fall due to recent currency movement, the likelihood of default is lower than it historically has been . “Two dreaded Cs” The headwinds of China and commodity prices remain a major point of differentiation across regions. Regions with low exposure to those two dreaded Cs will look like fundamentally better investments, at least until uncertainty over those areas persist. If the world is witnessing a secular shift in Chinese growth, that could be a period of several years. The trade linkages of emerging market economies is more important than ever in this context. Of the several emerging markets that are net commodity importers with low exposure to China, a few are notable: India and Poland. Indian GDP grew 7% last quarter (albeit partly because of a change in methodology that brings it in line with international norms), placing the country in a unique place with international investors: after Prime Minister Modi failed to live up to the unrealistic expectations for reform that were created during the early days after his election, it lost its place as an emerging market darling. However, in the current emerging market paradigm, India will continue to benefit from low commodity prices and has an economy that is largely based on domestic goods and services, insulating its business sectors from international uncertainty. While the other namesakes of the BRICS group crumble, each for its own idiosyncratic reason, India looks to be the only one on the upswing. Poland exhibits similarly low exposure to the dreaded Cs. It sits in a unique trade situation as a major manufacturer for the EU market , especially of automobiles, and an increasingly important member of the EU. Even as Europe has struggled to find growth, Poland has not. Now that the industrial and consumer spending prospects for most of Europe look their best since 2008, Poland stands to benefit. Underlining that potential is Poland’s strong democratic system and its low exposure to China. While volatility and indiscriminate fear across emerging market asset classes are still high in light of global macro trends, especially the Fed’s rate hike, there is an opportunity to differentiate between markets that will continue to fall victim to these trends, and those that will not. The wholesale euphoria of the last decade’s emerging market investments does not look to be on its way back soon, but the push towards higher growth and market-enhancing reforms still marches on for several key actors.