This “Twofer” Internet Player Leaves the S&P in the Dust

1 | By Michael A. Robinson

There were no fireworks last August – and no one that I know of attempted to declare it a federal holiday – but that month represented an absolutely crucial 20th tech anniversary.

Sometime in August 1994, people started ordering a certain CD, Sting’s Ten Summoners Tales, in a way they never had before – over a secure Internet connection.

Now, more than 20 years later, e-commerce has become such a powerful trend that it’s essentially become background music. Even if you never make online purchases, you know it’s there… humming away.

But thinking of e-commerce that way sells it extremely short.

The e-commerce industry is growing at an annual compound rate of 13% – more than six times faster than the U.S. economy. At that rate, the e-commerce market will rake in $2.4 trillion by 2018.

And I’ve found a perfect way to grab a nice chunk of all that e-commerce growth… and at the same time profit off a wealth of other unstoppable online trends…

Big Changes = Big Gains

So, we’ve gone from a few folks clicking a button to order a Sting CD to a tech sector that’s now larger than all but a handful of the world’s national economies.

And at its current growth rate, the value of global e-commerce transactions is doubling roughly every six years.

(As for me, my family’s doing our part. We shop online on nearly every day – and last month alone, the UPS guy made two dozen deliveries to our house.)

This is where the First Trust Dow Jones Internet Index (NYSE: FDN) comes in. Holding more than 40 stocks, FDN is an exchange-traded fund (ETF) that’s perfectly set up to take advantage of the rapid growth and big changes happening in e-commerce.

Strictly speaking, this is not an e-commerce “pure play.” FDN is focused on the whole Internet industry. So you should think of this as a “twofer” – one that let’s you profit from both e-commerce and the entire online world.

Take the case of eBay Inc. (Nasdaq: EBAY), FDN’s third-largest holding, which is spinning off its PayPal Inc. wing as a separate public company later this year.

It’s designed as a tax-free distribution to existing shareholders, so that means holders of FDN should automatically get a stake in PayPal when that happens.

That’s a great deal, because it’s a free play on the mobile commerce, the fastest-growing segment within e-commerce.

PayPal already ranks as a major player in mobile payments. It’s a field that industry analysts say could hit $1 trillion in transactions in as little as a decade.

Gartner says that last year shoppers spent $50 billion using their smartphones and tablets. And the forecasting firm says the amount could grow by fourfold to $214 billion by the end of this year.

EBay, of course, is a powerful force in its own right. With 157 million active buyers globally, it remains one of the world’s largest online marketplaces.

Founded in 1995, eBay’s impact on e-commerce shouldn’t be discounted – each year, roughly 800 million items are listed for sale on the site.

Social Sales

Social-networking leader Facebook Inc. (Nasdaq: FB) is FDN’s second-largest holding.

The forecasters at IBISWorld recently estimated global social-networking sales of $11 billion a year. The research firm says the industry is growing at 25% a year, meaning it’s doubling every 2.8 years.

Facebook claims 1.4 billion users – making it easily the largest social network in the world. About 50% of the global Web population now uses CEO Mark Zuckerberg’s site at least once a month.

And Facebook gives FDN additional exposure to mobile commerce. The company’s number of mobile users in this year’s first quarter hit 798 million, nearly double the number two years ago.

Mobile advertising revenue represented 73% of advertising sales for the first quarter of 2015, up from 59% in 2014’s first quarter.

The Rest of the Story

In other words, FDN holds several of the nation’s biggest e-commerce players.

Other names I know you know include Inc. (Nasdaq: AMZN), the dominant online shopping site; Google Inc. (Nasdaq: GOOGL), the search leader; and streaming king Netflix Inc. (Nasdaq: NFLX).

But FDN also holds some names you might not be as familiar with. I’m talking about firms such as:

  • NetGear Inc. (Nasdaq: NTGR) – I know this company well. I use two of its Ethernet switches to help manage the network I have in my home and office. NetGear sells devices for home, businesses and Internet service providers that deliver and enhance Web connections, both wired and wireless. The company just launched a line of Web-based security cameras that work wirelessly and connect to smartphones for remote monitoring. It trades at around $31.50, giving it a $1 billion market cap. NetGear has 10% profit margins and a 12% return on equity.
  • Group Inc. (Nasdaq: WWWW) – This is an Internet firm with a lucrative niche. It helps small businesses design their websites and set up their e-commerce services. It boasts more than 3 million customers that pay subscription fees for Web hosting, management services and search engine optimization (SEO), as well as for establishing social media and mobile connections. has a share price of $23.01 and a market cap of $1.2 billion, and it’s grown sales 62% annually for the past three years.
  • Blackbaud Inc. (Nasdaq: BLKB) – This is another specialty Internet play. It caters to nonprofits, research foundations and universities. It’s a bigger sector than you might think – the firm boasts 29,000 clients. They tap Blackbaud to help manage fundraising, accounting, online marketing and payment services. Trading at $51.70, it has a market cap of $2.35 billion. Blackbaud has a 16% return on equity and recently grew its quarterly earnings by some 43%.

FDN opened today at $67.60, giving it a market cap of $2.85 billion. That makes it a very cost-effective way to play the e-commerce boom.

And we should be looking for gains – fast.

After all, over the past year, FDN has left the Standard & Poor’s 500 Index in the dust. During the period, FDN gained roughly 17.1% – 71.2% better than the S&P 500’s one-year return.

FDN holds a rich portfolio of companies riding the unstoppable e-commerce trend – meaning it follows Rule No. 3 – and so it should continue to beat the market for years to come.

And that makes this ETF a great foundational tech play for your road to wealth.

P.S. I hope all are “Liking” and “Following” me at Facebook and Twitter. We’ve got a great community there who are eager to make big money in tech stocks today.

[Editor’s Note: What are your e-commerce shopping habits? Are you an everyday online shopper like Michael? Or are you concerned about cybersecurity? Michael loves hearing from you and answering your questions.]

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One Response to This “Twofer” Internet Player Leaves the S&P in the Dust

  1. Giuseppe Spagnolo says:

    Could you tell me what is the spinoff Paypal rate for playing FDN instead of EBAY directly?

    EBAY: 1:1

    FDN: ?

    Thanks for your advise

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