Companies focused on the Internet have come a long way since the dot-com bubble burst in the early 2000s. Many are enormously profitable…or headed in that direction. And their stock prices generally are not absurdly high multiples of their earnings. But even now, Internet stocks are 40% more volatile than the Standard & Poor’s 500 stock index, on average. That’s because investors have high expectations for their growth potential, which keeps their valuations elevated but makes them vulnerable to sharp pullbacks on disappointing developments.
For investors who can stand the volatility, some Internet stocks can pay off big. Priceline has averaged a 49% annual return over the past decade…and Netflix, 47%. This sector will continue to offer enticing investments as the Internet becomes even more deeply ingrained in how we shop, entertain ourselves and interact with others. Investors can temper some of the volatility through three exchange-traded funds (ETFs) that spread the risk…
First Trust Dow Jones Internet ETF (FDN) invests in about 40 stocks of US-headquartered companies ranging from giants such as Amazon.com, Facebook and Google to small firms such as Cornerstone OnDemand, which provides management software. Over the past five years, the ETF had annualized returns of 19.5%, compared with 14.7% for the S&P 500.
PowerShares Nasdaq Internet ETF (PNQI) invests in about 100 stocks including foreign Internet companies listed on US stock exchanges. It had annualized returns of 20.3% over the past five years.
Emerging Markets Internet & Ecommerce ETF (EMQQ), which was launched in 2014, invests in about 40 stocks including the Chinese e-commerce giant Alibaba.