2023-03-22 08:44:02 ET
Summary
- PNQI invests in stocks associated with IoT (internet of things).
- This ETF differs from its alternatives in that it’s more focused on communications than technology.
- PNQI’s consistent drawdown beginning in mid-2022 could position this ETF for a rough year.
The Invesco NASDAQ Internet ETF ( PNQI ) could provide investors with avenues to profit from the innovative and constantly developing internet industry. However, this ETF’s amplified response to the 2022 bear market makes me skeptical of its long-term profitability and ability to transcend both its peers and the broader market. I give PNQI a hold rating.
PNQI has greater holdings in communication and consumer discretionary compared to other internet ETFs. This could be potentially advantageous, as wireless communication , social media , and other online entertainment platforms have become a central part of the internet. Though technology is likely a more followed sector, the communication sector is also heavily involved in the internet, especially as social media trends remain strong .
This ETF is currently quite cheap, but I’m not convinced that this warrants a buy. Simultaneously, it’s difficult to envision one profiting from selling this low. Investors are likely better off investing in a leading internet ETF like the Invesco QQQ ETF ( QQQ ).
Strategy
PNQI tracks the NASDAQ CTA Internet TR USD Index and uses a full replication technique. This may serve to provide investors with more exposure to the larger, more liquid companies that are actually overseeing the internet industry. This ETF invests in both growth and value stocks within the public equity markets of the United States, with some lesser exposure in East Asia.
Holdings Analysis
PNQI has holdings within several sectors. Most stocks in this ETF are centered on communication, with this sector comprising 36% of total sector allocation. Secondly, PNQI also invests heavily in technology and consumer cyclical, allocating almost 50% to these two sectors.
This ETF allocates 61% to the top 10 holdings while the top 25 comprise 88% of the total holdings in a fund of 81 holdings. This makes PNQI very top heavy. Furthermore, the top three holdings Meta Platforms ( META ), Microsoft ( MSFT ), and Amazon ( AMZN ) account for over a quarter of total holdings. In this regard, investors should consider potential concentration risk generated by this holdings composition.
PNQI invests primarily within the United States with almost 90% of its investments residing within the country. Non-United States locations like Singapore and Hong Kong are thereby given minimal consideration and are unlikely to meaningfully affect overall performance.
PNQI Top Holdings (Seeking Alpha )
Strengths
The IoT (internet of things) industry has strong growth forecasts and could proliferate this ETF’s returns in the long-term. As it’s forecasted to exceed $1.7T in revenue by 2030 at a CAGR of 20%, IoT could be at the forefront of many investors’ minds in the coming years.
PNQI could benefit from developments in Ecommerce. Ecommerce expansion could generate opportunities for partnerships with IoT (internet of things) companies. Such partnerships could involve the implementation of artificial intelligence into online shopping as well as emerging retail companies and startups forming their business models around Ecommerce .
Weaknesses
PNQI may have a more difficult time thriving in a high-inflation environment compared to alternative funds like QQQ, as depicted in the chart below.
Despite having a similar holdings composition and sector focus, QQQ appears to perform better during market downturn. Given the ease in which one could choose one over the other, this could make PNQI less attractive going forward.
This ETF also does not pay dividends, which could be especially deterring in the current economic environment. Many investors still favor dividends over growth , and PNQI’s high volatility also does not help its case.
Opportunities
In the long-term, PNQI could benefit significantly from better economic conditions. As seen in the graphs previously-displayed, this ETF appears to outperform before the 2022 bear market that sent it plunging. Therefore, enhancing market sentiment could draw many towards this ETF.
Social media remains a core aspect of the internet and also has decently strong growth forecasts, with revenues expected to grow to more than $300B by 2030 at a rate of 26%. Social Media is also becoming increasingly important in business and marketing . In the event that a raised market outlook prompts the emergence of new businesses and startups, social media companies held in PNQI could profit.
North America social networking market forecast (Grandview Research )
Threats
Though social media companies’ role in business development could enhance profits, social media is also frequently associated with addiction and mental health issues . Popularization of this stigma could rupture social media companies’ societal image and possibly hurt the profits of certain holdings in PNQI. Social media has also before catalyzed irrational market speculation . Namely, bank runs in the past two weeks that some deemed to be an overreaction were primarily fueled by twitter activity. In this regard, social media is also potentially dangerous for its ability to afflict other sectors’ performances.
PNQI’s technology exposure also puts it at risk of cyberattacks. Cyberattacks have increased in recent years and are forecasted to keep increasing. A data breach could jeopardize the performance of several companies within this ETF, and hackers are only getting smarter and more threatening. I cover this in greater depth in my pieces on the First Trust Nasdaq CEA Cybersecurity ETF ( CIBR ) and the iShares Cybersecurity and Tech ETF ( IHAK ).
Conclusions
ETF Quality Opinion
PNQI is a quality ETF that could benefit from the increasingly-prevalent role of social media and wireless communication in affairs like business and marketing. Its greater allocations to communications over technology distinguish it from alternatives and may attract those seeking sector diversification. However, this ETF appears to perform poorly during market downturn compared to alternatives, leading the risks to override potential rewards.
ETF Investment Opinion
I rate this ETF a hold. PNQI has consistently underperformed the internet industry and the broader market following a large bearish period during the first half of 2022. This ETF also does not appear to have any notable advantages over alternatives like QQQ, which performed better than PNQI during the 2022 bear market. For these reasons, this ETF does not suffice a buy rating while also not being an attractive sell at the moment.
For further details see:
PNQI: This Internet ETF Sees Growth Through The Lens Of Telecommunication