Equity: U.S. Internet
The US Internet segment is home to three ETFs with completely different approaches to capturing the market. FDN holds a broad, market-cap-weighted set of US Internet companies, focusing on
“the funds differ in costs and risks to hold and to trade” the biggest of the big. PNQI is broader still, but includes international companies with U.S. listings—about 16% of its portfolio is located overseas. PNQI also implements a more complicated weighting scheme that caps the biggest companies at 8% and redistributes their excess weight to the smaller companies. PXQ focuses narrowly on networking companies and limits its portfolio to the 30-highest-ranked companies according to its quantitative model.
Exposure aside, the funds differ in costs and risks to hold and to trade. FDN leads the pack by far with respect to both assets and liquidity and charges 60 bps annually. PNQI charges the same 60 bps but has much wider spreads (24 bps) than FDN (4 bps), driving total costs up. PXQ charges slightly more and has about the same spreads as PXQI. (Insight updated 01/16/17)
ETF.com Efficiency Insight
The three US Internet funds charge similar fees and share similar scores, but important cost and risk differences exist. PNQI and FDN share top honors for the lowest fee, charging 60 bps
“FDN is the clear favorite in assets” annually. However, PNQI’s actual all-in costs are higher due to its much larger spreads.
FDN is also the clear favorite in another area: assets. Its $2B in AUM is roughly 90% of the total for the segment. Often, asset-leaders like FDN are the first movers in the space, but that’s not true here. PXQ’s 2005 launch predates FDN by a year, yet that fund holds less than $30M. We still see minimal fund closure risk for PXQ at this time but some investors may not be comfortable with its asset level. (Insight updated 01/16/17)
ETF.com Tradability Insight
FDN simply dominates the segment in liquidity, and it’s the only fund here offering robust Tradability across the board. Small investors can expect tight bid/ask spreads and brisk
“FDN is the only fund here offering robust Tradability across the board” volume. Large investors working with liquidity providers should also see low costs and can expect minimal price impact on creates and redeems.
PXQ and PNQI fall in the second tier of Tradability. Compared with FDN, they trade at much wider spreads and far less volume. For retail investors, this means that the funds are accessible, but extra care is needed to transact, and that trading expense should be considered in the context of the intended holding period. (Insight updated 01/16/17)
ETF.com Fit Insight
Investors have a broad range of coverage choices within the narrow scope of US Internet funds. All three funds track indexes with a smaller average market cap than our benchmark's
“Those looking for plain vanilla exposure have an excellent choice in FDN” definition of the market. Of our funds, FDN is the only fund in the segment to offer market cap selection and weighting, and unlike some peers, delivers pure US coverage.
In comparison, PNQI caps the weights of its top holdings at 8% for the top 5 and 4% for the remaining securities in an attempt to rein in the impact of industry giants like Google. Despite this methodology, the fund has an higher average market cap than FDN, which better resembles our benchmark. PNQI includes US-listed ADRs in firms like Baidu, China’s answer to Google. In all, about 16% of its portfolio is allocated to international companies.
PXQ weights its holdings equally in tiers, and as a result, tilts very small: Its weighted-average market cap is about 1/10th that of the benchmark. Despite the bias toward smaller firms the PXQ's market risk is significantly lower (beta of around 0.70). That is likely due to different industry exposures than our benchmark as the fund heavily emphasizes communications and networking as well as IT services firms. This intentional difference from broad coverage lowers its Fit score and could appeal to investors interested in this narrow niche, but has nonetheless dramatically lagged our benchmark over the past 12 months.
In sum, the three funds provide radically different exposure. FDN offers excellent plain-vanilla coverage, PNQIs broad coverage includes foreign firms, and PXQ focuses narrowly on certain subsegments of the internet industry. (Insight updated 01/16/17)