3 Tech ETFs with the Most Google Inc (GOOG) Stock Exposure


The tech sector has turned around with impressive growth rates and earnings beat ratios for the most recent earnings season. Total earnings for the sector that have reported results so far are up 6% with beat ratio of 68.3%, while revenues for these companies are up 3.7% with revenue beat ratio of 50.8%.

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Though Apple (AAPL) dominates the broad tech sector, Google (GOOG – Analyst Report) has also shown its ability to lead the space. The company performed remarkably well following its astounding third quarter results. Earnings per share came in at $11.24, strongly beating the Zacks Consensus Estimate by $3.09.

Google breached its major milestone of $1,000/share after the earnings announcement last month and is currently hovering near its all-time high of $1,048. This has helped GOOG to gain the second position in this sector in terms of market cap, leaving behind its tough competitor Microsoft (MSFT). The stock gained nearly 46% in the year-to-date time frame.

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Despite stiff competition from Facebook (FB) and Yahoo (YHOO), the world largest Internet company is enjoying much higher attention from investors of late on increased mobile and video advertising revenues (read: 3 ETFs with the Most Facebook (FB) Exposure in Focus).

Revenues from the Internet business jumped 23% while total advertising revenue soared 17% in the third quarter. Mobile traffic is gaining strong momentum as nearly 40% of YouTube traffic now comes from mobile, up from 6% two years ago.

The Android operating system, YouTube and the new advertising system – Enhanced Campaigns – launched in July may continue to drive advertising revenues. Additionally, Google recently allowed Nielson Holdings (NLSN) to track ad views on YouTube, which is an added advantage to its advertising business.

Moreover, most analysts are bullish on the company’s growth outlook and revised their target prices upward. This has spread optimism across the whole tech sector, suggesting that the tech giant is on a solid growth trajectory.

Google currently has a decent Zacks Rank #3 (Hold), underscoring that it has potential for further upside. Given the bullish outlook and the impressive run up in GOOG share prices, we have highlighted three ETFs with heavy exposure to this giant for investors seeking to bet on the stock along with its broader industry at this time (see: all the Technology ETFs here).

iShares Dow Jones US Technology ETF (IYW – ETF report)

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds 142 stocks in its basket with AUM of $2.9 billion while charging 45 bps in fees and expenses. Volume is solid as it exchanges more than 325,000 shares a day.
Of the major holdings, GOOG occupies the second position in the portfolio, making up 10.37% of the assets. The product is heavily skewed toward the hardware and equipment segments, as these make up more than half of the portfolio. Software & computer services take the remaining portion in the basket.

In terms of performance, the ETF added 4.4% following the Google results and 19.50% so far this year. The product has a Zacks ETF Rank of 2 or ‘Buy’ with a ‘High’ risk outlook.

First Trust Dow Jones Internet Index (FDN – ETF report)

This is one of the more popular and liquid ETFs in the broad tech space with AUM of over $1.6 billion and average daily volume of nearly 280,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year.

The ETF holds a small basket of 41 stocks with Google as the top firm with 11.03% of total assets. This indicates that Google dominates the fund’s return as none of the other firms holds more than 8.77% share. The Internet and mobile segment account for more than half the portfolio, followed closely by Internet retail at 25% of assets.

The ETF is up nearly 43% year-to-date and increased 3.7% following Google’s earnings announcement. FDN has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (read: Top Ranked Internet ETF in Focus: FDN).

PowerShares Nasdaq Internet Portfolio (PNQI – ETF report))

This fund provides broad exposure to the Internet industry by tracking the Nasdaq Internet Index. The fund has accumulated AUM of $231.7 million while charging 60 bps in fees per year. Volume is light though.

In total, the fund holds 81 stocks in its basket. Out of these, Google takes the third spot at 8.60%. In terms of industrial exposure, Internet & mobile application make up for two-third share in the basket, followed by Internet retail and software & programing (read: 3 Internet ETFs Leading the Tech World Higher).

PNQI gained 3.1% following GOOG earnings beat and nearly 53% year-to-date. The ETF currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘High’ risk outlook.

The following table compares the performance of these three ETFs with that of Google from a risk/return tradeoff point of view.

ETFs YTD Returns (as of Nov. 21) Returns Since Q3 GOOG Earnings (as of Nov. 21) Correlation With Google’s YTD Share Price Risk (Annualized Standard Deviation)
IYW 19.50% 4.38% 0.89 14.33%
FDN 42.75% 3.69% 0.85 15.73%
PNQI 53.01% 3.10% 0.82 16.90%
GOOG 46.18% 16.30% N/A 22.13%

Bottom Line

While it is true that Google has generated more in returns than many of the ETFs, the exposure to only GOOG requires above par risk appetite given its higher volatility (annualized standard deviation is 22.13%).

In order to minimize this risk, investors could definitely look to the three ETFs that have a high correlation to that of GOOG’s share price. Out of the three, IYW with a correlation of 0.89 seems the best choice for investors seeking to ride the most of the recent surge in Google given higher returns and less risk (see more in the Zacks ETF Center).

The other two products – FDN and PNQI – also require lower risk tolerance levels and provide diversified exposure to the Internet segment. However, both have clearly benefited from the jump in Google shares, and could continue to do well if this tech giant remains a strong performer.

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