Happy Days For The Media ETF

by on May 27, 2010 | ETFs Mentioned:

When companies began tightening their belts as the most recent recession hit, advertising budgets were slashed in an effort to minimize losses in the short term and weather the storm. This behavior had a significant impact on companies that generate significant revenues from advertising, and broadcast television networks endured one of their leanest years in decades. But as markets have steadily recovered over the last 14 months (the recent tumultuous stretch aside) and consumer confidence has climbed, companies are beginning to loosen the purse strings, and the advertising dollars are once again flowing. After enduring last year’s famine, media companies may be preparing to feast once again.

The upfront market for the new television season has gotten off to a hot start, advertisers already gobbling up significant air time. “It’s a major reversal from last year when talks dragged on through much of the summer in a harsh economic climate,” writes Suzanne Vranica. “The pace of deal making is being buoyed by increased ad spending by the telecommunications and auto industries.”

Beyond the anecdotal reports of increased activity from ad buyers, there is some statistical evidence that the ad market is coming back to life. Kantar Media reported this week that first quarter ad spending on major media increased 5.1% to $31.3 billion, the first quarterly increase since 2008 and the largest gain since early 2006. The resurgent automotive industry is a major drivers of the uptick in spending; ad sales to car companies rose almost 19% in the first quarter. After nearly collapsing under its own weight, the U.S. automotive industry has executed an impressive turnaround, with many of the major players even turning a profit (see Why We Need An Automotive ETF).

Media ETF: Ready To Surge?

The blue skies ahead could be good news for the PowerShares Dynamic Media Portfolio (PBS), one of the best ways to establish exposure to a basket of television networks, publishers, and digital media companies. PBS tracks the performance of the Dynamic Media Intellidex Index, a benchmark that includes about 30 companies engaged in the development, production, and distribution of goods or services used in the media industry.

PBS’s top holdings include diversified media giants such as Viacom, Walt Disney, News Corp., and Time Warner. The fund also holds more targeted companies such as DirecTV and HSN, and even has a moderate allocation to Google (see a breakdown of PBS holdings).

The media ETF has been on a wild ride over the last two years. Between the start of 2008 and the bear market lows in march of 2009, PBS lost nearly 60% of its value as ad spending plummeted. But on the way back up, PBS has been one of the top performing equity ETFs; the fund has gained more than 125% since bottoming out.

Disclosure: No positions at time of writing.