2023-08-14 08:13:57 ET
Summary
- The Invesco NASDAQ Internet ETF is up 39% this year, but investors aren't biting yet. In over 15 years, PNQI has amassed less than $600 million in assets under management.
- PNQI's 0.60% expense ratio is likely the key reason. Still, even with these high fees, PNQI steadily outperformed QQQ up to December 2021 before suffering a substantial drawdown.
- The ETF is about one-third each allocated to Consumer Discretionary, Technology, and Communication Services. My long-term analysis of sector ETF returns indicates this mix works.
- Furthermore, PNQI has excellent sales and earnings growth rates and trades at a similar valuation to QQQ. The downside is it's more speculative and volatile, while quality is mediocre.
- Depending on how aggressive you want to be, PNQI would immediately boost your portfolio's growth potential. However, I think the ship has likely sailed, and it's more prudent to wait for a pullback.
Investment Thesis
Today, I am initiating coverage on the Invesco NASDAQ Internet ETF ( PNQI ) , a top-performing fund this year that's up 39% this year. PNQI is unique because it offers approximately one-third exposure each to companies in the Communication Services, Consumer Discretionary, and Technology sectors, whose primary business is internet-related. In addition, except for a mediocre profit score, PNQI features much more substantial earnings growth than the Invesco QQQ ETF ( QQQ ), and its constituents are finishing an impressive earnings season. In this article, I balance these advantages with PNQI's flaws, like higher volatility, a worrisome 38% decline in 2022, and an elevated 0.60% expense ratio, to arrive at what I believe is a reasonable conclusion. I hope you enjoy the read.
PNQI Overview
Strategy Discussion and Key Exposures
According to the methodology document , common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests, and tracking stocks are eligible for inclusion in the Nasdaq CTA Internet Index, which PNQI aims to track. Index securities are evaluated each March, and eligible securities must:
- be classified as a company whose primary business includes internet-related services (e.g., software, search engines, web hosting)
- be listed on the Nasdaq Stock Market, the NYSE, the NYSE American, or the CBOE BZX Exchange
- have a minimum $200 million market cap, 100,000 three-month average daily trading volume, and $3.00 share price
The Index follows a modified market-cap-weighting scheme. The maximum weight for any security is 8%, and only five securities are at that limit. Next, remaining securities with weights above 4% are capped at 4%, with the excess weight redistributed proportionally across the remaining securities. The Index rebalances quarterly in March, June, September, and December.
Amazon ( AMZN ) and Meta Platforms ( META ) currently have weights above 8%, while Alphabet ( GOOG ) , Microsoft ( MSFT ) , and Salesforce ( CRM ) round out the top five. The top ten holdings total 60%, so despite the tiered weighting scheme meant to improve diversification, PNQI is still heavily concentrated. That said, if the Index were market-cap-weighted, the total weight would be 87%, with Microsoft, Alphabet, and Amazon commanding a combined 64%. If these caps weren't in place, it likely would decrease the appeal of the ETF, as investors could simply own the top stocks and save on fees.
PNQI's sector exposures are below, alongside the SPDR S&P 500 ETF ( SPY ) and QQQ. QQQ is a good comparator as it's also a multi-sector growth fund.
We see the one-third breakdown between Consumer Discretionary, Technology, and Communication Services I described earlier. PNQI also has 4-5% in Financials and Industrials, but that's about it. In contrast, QQQ is 48% in Technology and 14-16% in Consumer Discretionary and Communication Services.
The Consumer Discretionary Select Sector SPDR ETF ( XLY ) and the Technology Select Sector SPDR ETF ( XLK ) have excellent long-term track records. The table below ranks each sector's ETF's annual returns between 2005-2023, highlighting how XLY and XLK ranked #5/11 on average and #4/11 on median returns. The Communication Services Select Sector SPDR ETF ( XLC ) ranked #7/11 and #6/11, slightly below average. However, it's understandable why you would want to overweight these growth-oriented sectors, especially if you have a long time horizon. Please see my latest article on the Industrial Select Sector SPDR ETF (XLI) for complete annual returns data.
Performance Analysis
The following graph highlights PNQI's performance against QQQ and the Vanguard Information Technology ETF ( VGT ), a top-performing sector fund. What's interesting is that until December 2021, PNQI led both until it collapsed last year, losing 47.92% compared to 32.58% and 29.70% for QQQ and VGT. All three ETFs are up about 39% in 2023.
These results suggest PNQI is a high-potential fund you might have overlooked, given how the ETF has less than $600 million in assets under management over 15 years. I assume the 0.60% expense ratio is a key reason, but that's not to say the strategy is flawed. However, PNQI's higher standard deviation stands out, contributing to relatively poor risk-adjusted returns (Sharpe Ratio).
PNQI Analysis
The following table highlights selected fundamental metrics for PNQI's top 25 holdings, totaling 85.97% of the portfolio. I've also included QQQ's metrics in the last row for comparison purposes.
From a growth perspective, PNQI looks excellent. Its constituents grew sales by an annualized 21.03% over the last five years and are projected to grow by 13.72% more over the next twelve years. Both metrics are 3-6% better than QQQ. On estimated EBITDA and EPS, PNQI is better by 3-4%. Salesforce ( CRM ) , Disney ( DIS ) , and Trip.com Group ( TCOM ) are three companies with double-digit growth estimates across the board and aren't in QQQ, so the two ETFs could complement each other. The ETF Research Center notes a 26% overlap by weight , though the actual figure is 32%, as both merely hold different share classes of Alphabet.
PNQI's 7.27/10 EPS Revision Score is one of the highest I've seen for a multi-sector ETF, and alongside its 17.76% weighted average earnings surprise figure last quarter, suggests plenty of earnings momentum. Amazon beat on earnings by 89.54% last quarter and 43.26% beat in Q1, leading Wall Street analysts to universally (35/35) up their earnings estimates. As a result, Amazon has a perfect "A+" EPS Revisions Grade from Seeking Alpha.
PNQI's 31.88x forward earnings valuation is high, considering how SPY trades at 26.30x. It's a concern, and although PNQI's holdings delivered on earnings this quarter, quality remains mediocre. Despite the top seven stocks having 10/10 Profit Scores (A+ Profitability Grades), several others make PNQI more speculative than your average large-cap growth fund, including Uber Technologies ( UBER ) , Shopify ( SHOP ) , DoorDash ( DASH ) , and Spotify Technology ( SPOT ) . While 81.76% of QQQ by weight have a 10/10 Profit Score, the same is true for only 59.83% of PNQI, and I believe this difference explains PNQI's higher historical volatility.
Investment Recommendation
I was pleased to find that PNQI outperformed QQQ before 2022. The one-third division between the Consumer Discretionary, Technology, and Communication Services sectors worked well and is supported by my sector rankings analysis from 2005-2023. In addition, PNQI features excellent fundamentals, highlighted by a 17.76% last quarter earnings surprise figure and a 3-4% advantage over QQQ on estimated sales and earnings growth. However, investors must balance these pros against PNQI's mediocre quality, higher volatility, and how it's already up 39% on the year. The risk isn't worth it for me, so I recommend readers wait for a pullback in the near term and then reassess. Thank you for reading, and I look forward to the comments below.
For further details see:
PNQI: Meet This Internet ETF With Extraordinary Growth Potential