PNQI. This Internet ETF sees growth through the lens of telecommunications

Invesco NASDAQ Internet ETF (NASDAQ:PNQI:) can provide investors with ways to profit from the innovative and ever-evolving Internet industry. However, this ETF’s heightened reaction to the 2022 bear market makes me skeptical about its long-term profitability. and can outperform both its peers and the broader market. I give PNQI a hold rating.

PNQI has a higher exposure to communications and consumer discretionary than other Internet ETFs. This can be potentially beneficial because wireless connection, social mediaand other online entertainment platforms have become a central part of the Internet. While technology is likely to be the more followed field, the communications field is also heavily involved in the Internet, especially when social media trends follow. strong.

This ETF is currently quite cheap, but I’m not convinced that warrants a buy. At the same time, it’s hard to imagine anyone making a profit selling so low. Investors are probably better off investing in a leading Internet ETF, such as the Invesco QQQ ETF (QQQ:).

Strategy

PNQI tracks the NASDAQ CTA Internet TR USD Index and uses a full replication technique. This can serve to give investors greater exposure to the larger, more liquid companies that actually control the Internet industry. This ETF invests in both growth and value stocks in the US public equity markets, with somewhat less exposure to East Asia.

Analysis of holdings

PNQI has holdings in several industries. Most of the holdings in this ETF are focused on communications, with this sector accounting for 36% of the total sector allocation. Second, PNQI also invests heavily in technology and consumer discretionary, allocating almost 50% to these two sectors.

This ETF allocates 61% to the top 10 holdings, while the top 25 make up 88% of the fund’s total holdings of 81 holdings. This makes PNQI very difficult. Furthermore, the top three holdings, Meta Platforms ( META ), Microsoft ( MSFT ), and Amazon ( AMZN ), account for more than a quarter of total holdings. In this regard, investors should consider the potential risk of concentration resulting from this composition of holdings.

PNQI invests primarily in the United States, with nearly 90% of its investments located domestically. Non-United States locations such as Singapore and Hong Kong thus receive minimal attention and are unlikely to significantly impact overall performance.

Strengths

The IoT (Internet of Things) industry has strong growth projections and could boost this ETF’s returns over the long term. With revenues projected to exceed $1.7T by 2030 at a CAGR of 20%, IoT may be at the forefront of many investors’ minds in the coming years.

PNQI can benefit from developments in e-commerce. E-commerce expansion can create opportunities for collaboration IoT: (Internet of Things) companies. Such collaborations may include the introduction of artificial intelligence Online shopping as well as the emerging retail companies and startups that shape them business models around E-commerce.

Weak spots

PNQI may have a tougher time in a high-inflation environment compared to alternative funds like QQQ, as shown in the chart below.

Despite similar holding composition and sector focus, QQQ outperforms during market downturns. Given the ease with which one could choose one over the other, this may make the PNQI less attractive in the future.

This ETF also doesn’t pay dividends, which can be particularly discouraging in the current economic climate. Many investors still contribute to dividend growthand PNQI’s high volatility doesn’t help its cause either.

possibilities

In the long term, PNQI could benefit significantly from better economic conditions. As you can see from the charts shown earlier, this ETF appears to be outperforming until the 2022 bear market that caused it to fall. Hence, strengthening market sentiment may draw many to this ETF.

Social media continues to be a major aspect of the internet and also has decent growth projections with revenues expected to: to grow over $300 billion by 2030 at a 26% interest rate. Social media is also becoming increasingly important in business and marketing. With an elevated market outlook prompting the emergence of new businesses and start-ups, social media companies located in the PNQI could profit.

Threats

While the role of social media companies in business development can increase profits, social media is also often tied up addiction and: mental health issues. Publicizing this stigma could damage the social image of social media companies and possibly harm the profits of some holdings in PNQI. Social media has also catalyzed irrationality in the past market speculation. That is, the bank is working in the past two weeks, which some considered overreaction were primarily fueled by Twitter activity. In this sense, social media is also potentially dangerous in its ability to influence the activities of other industries.

PNQI’s technological exposure also puts it at risk of cyber-attacks. Cyber ​​attacks have increased last years and are projected to continue to grow. A data breach could jeopardize the operation of several companies within this ETF, and hackers only gain smarter and more menacing. I cover this in more depth in my articles 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 can benefit from the increasingly popular role of social media and wireless communication in things like business and marketing. The greater allocation to communications over technology differentiates it from the alternatives and may appeal to those looking to diversify into the sector. However, this ETF appears to perform poorly in market downturns compared to alternatives, leading to risks of potential rewards being eliminated.

ETF investment opinion

I value holding this ETF. The PNQI has consistently underperformed the Internet industry and the broader market after a major bearish period in the first half of 2022. This ETF also doesn’t appear to have any significant upside over alternatives like QQQ, which outperformed PNQI in the 2022 bear market. For these reasons, this ETF does not meet a buy rating, while it is also not an attractive sell at this time.