Both a new technology and new way to invest grew up hand in hand.
The Internet turned 20 years old this week, and it’s given rise to not only wildly successful companies like Facebook and Amazon, but has also opened up a whole new world of investment opportunities increasingly using ETFs.
Coincidentally, the ETF is celebrating its 20th birthday this year as well, so it seems like a propitious time to take measure of how ETF innovation has kept pace with an Internet revolution that the geopolitical think tank Stratfor says has “changed how people communicate, how economies operate and how societies function.”
There’s no question that in some ways, the Internet and the exchange-traded fund are facets of the same technological forces that have democratized the flow of information.
More broadly, investing in Internet-focused strategies using ETFs has grown increasingly nuanced in the 20 years since the 1950s-era government project was finally unleashed in the public realm in the form of what was once commonly referred to as the “World Wide Web.”
ETF investors today have access to roughly 50 strategies that slice and dice the technology segment—and serve up varying levels of exposure to Internet-specific names—in a way that was not available 20 years ago.
One of the first technology-focused ETFs that tap into Internet securities, but that offers a broad access to the segment as a whole, marked its 14th birthday last month. The PowerShares QQQ Trust (NasdaqGM: QQQ) was certainly one of the pioneers, and remains the biggest ETF in the tech segment, with more than $33 billion in assets.
Internet software and services is only part of that portfolio, as noted, representing roughly 12 percent of the mix, which also includes Internet and catalog retail, software names, computers and IT services, to name a few.
But since the “Q’s,” many other funds have emerged, tapping into a segment that only seems to grow in economic importance.
Goods & Services Revolution
“The Internet has had profound effects on global commerce, signaling a revolution in the production and flow of goods and services,” Stratfor said in its note. “The advent of the Internet has allowed for increased efficiency and thus lower costs in the supply chain. It has increased profits and enhanced flexibility.”
Perhaps one of the most notable success stories is the First Trust Dow Jones Internet ETF (NYSEArca: FDN), a fund that has assets now hovering the $1 billion mark.
FDN, launched roughly seven years ago, allocates primarily to information technology names—as much as 71 percent of the portfolio is tied to that segment—but also includes consumer discretionary and even health care stocks. Its biggest holdings include Google, with a 10 percent weighting, followed by Amazon, eBay, Priceline.com and Yahoo.
First Trust alone, as an ETF provider, has grown its Internet-focused product lineup to a roster of six ETFs, most recently expanded with the launch of the First Trust Nasdaq Technology Dividend ETF (NYSEArca: TDIV) last August.
Indeed, fund providers from iShares to Guggenheim to State Street Global Advisors, to those offering leveraged or inverse plays such as Direxion and ProShares, have become creative with ways to offer investors access to the one technology that has changed everything from communication to economies.
Funds from the Technology Select Sector SPDR (NYSEArca: XLK), to the Vanguard Information Technology ETF (NYSEArca: VGT)—the cheapest ETF in the segment, with an expense ratio of 0.14 percent—to the iShares Dow Jones U.S. Technology Index Fund (NYSEArca: IYW) have all gathered a following among investors.
“Geography has an important influence on the behavior of nations,” Stratfor said. “But it is just as important to recognize when technology has the potential to alter the map.”