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Internet ETFs

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Average returns in this Category	3 months return	6 months return	12 months return	YTD return

Internet	9.16%	48.38%	-7.97%	56.47%

Ticker SPY	Name	3 months return	6 months return	12 months return	YTD return

BHH	B2B Internet HOLDRS ETF	5.13%	57.69%	-25.45%	78.26%

BDH	Broadband HOLDRS ETF	6.71%	43.22%	0.48%	47.76%

FDN	First Trust Dow Jones Internet Index Fund	16.22%	57.59%	5.77%	56.81%

IAH	Internet Architecture HOLDRS ETF	19.74%	51.33%	1.44%	47.13%

HHH	Internet HOLDRS ETF	10.84%	46.26%	-0.1%	49.87%

IIH	Internet Infrastructure HOLDRS ETF	8.82%	8.29%	-19.27%	15.03%

PNQI	NASDAQ Internet Portfolio ETF	16.08%	61.87%	8.47%	61.16%


	About Internet ETFs
Internet ETFs Overview and forecast The Internet ETFs are a strange mix, and they trade strangely. In 2009, they've gone off the boil, as traders. They started out as traditional ETF models, in most cases, and were trading heavily for most of the decade, but they simply tanked in early 2009. They've come up from abysmal lows, with the odd big trading spike, but the dollar values speak for themselves on the charts. Some market performances have involved bumping along the bottom in the lower bandwidth of prices. The overall best performance in the second quarter of 2009, which is a 30% resurgence, has even in some cases left them back below the crash era prices in 2008 and early 2009. Others in fact went down. It hasn't been a sparkling performance, by most of them. There isn't much wrong with their holdings, although some weightings look rather overdone. Most of the Internet ETFs hold solid communications stocks, not market pariahs. The overall view is that the action and the traders are elsewhere, which is understandable in view of the big gains in other parts of the ETF market. Short term (6 months) As far as the ETF market is concerned, the upside to the Internet ETFs is similar to people who are playing a game for pride, rather than to win it. They are capable of producing a continued upward movement, but there are absolutely no indications of any great interest. Even the occasional big spikes in volumes haven't equated to an indication of significant trader interest. The only positive point in the Internet ETFs is that coming off their lows, some of them managed to generate decent trading volumes and respectable price movements in May 2009. There is a legitimate case for predicting a sustained upward movement in the short term, but it won't be anything too dramatic, or particularly fast. Significant upward moves seem to take about a month, in a rising market. Medium term (2 years) The stocks held by the Internet ETFs include giants like TIME Warner. There's not much doubt that the major league holdings will improve, and will contribute solidly to the Internet ETFs' returns. In that respect, there is a reasonable expectation of improvement, based on holdings, if not on actual ETF performance, in the medium term. However- there are problems. The Achilles Heel of the smaller ETFs, the under- capitalization effect, in which ETFs don't hold enough to benefit from moves in their holdings, is another problem. Some of the Internet ETFs are mid- size, and will do better. Others are so strangely weighted that it's difficult to believe they'll do anything much but be a way of dragging down the sector averages. Plausibility is the key here, and it wouldn't be at all surprising to see the fund managers doing major surgery on these ETFs in the future. Long term (5 years) These ETFs will have to justify their existence, in the longer term. They're tying up money which could be better used elsewhere, in some cases. They're too small, or too much like an accrual based investment, to demand much real credibility. In some cases, Internet ETFs got hit severely in 2003, rose back to about half their pre 2003 prices, did almost nothing between 2004- 2008, then crashed. The track record is unimpressive at best. In the long term, they will either die off, or be recharged by fund managers into more viable investment products. Capital is in demand, and the Internet ETFs are absorbing capital without generating returns. It's that simple. Qualifiers to projections The only thing the Internet ETFs have going for them is that because they're directly plugged into the internet companies, there is reason to think that they'll resurface in other forms, with much more capital and much better models than the obvious failures of the original versions. The capital requirements for future investments in internet business will be huge, and super ETFs are likely to be the result. The mere description of Internet ETFs should send warning signals to investors. The spread model of all ETFs works in all other sectors, but it's done very poorly in this category. This is not a soft market. It doesn't necessarily follow the main indices, nor does it react the same way as the mainstream moves. Traders have voted with their feet and their money, and if they're present in their millions in other ETF sectors, they're barely bothering the sales charts with the Internet ETFs. Be careful, be informed, and watch the lows.

Last Updated on: 2010-01-14 02:03:40

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