Thursday’s ETF To Watch: FDN

by on July 15, 2010 | ETFs Mentioned:

Trading volumes have slumped on Wall Street in recent sessions, as most investors have waited anxiously for another earnings season to give the markets direction and offer an assessment of the recovery. This season got off to a hot start; aluminum manufacturer Alcoa and train operator CSX posted solid earnings, which helped to buoy the markets to start the week. Intel then crushed estimates, posting its highest quarterly profit in more than a decade. But despite the bullish report from the computer chip maker, markets stayed flat yesterday after the Fed trimmed its expectations for growth in the overall economy and job creation. Now all eyes will focus on Google (GOOG), which will post its second quarter earnings after the bell today. Investors will be eager to see if the search giant can live up to expectations, and give the tech sector a boost in the process.

The company is expected to report earnings of $6.53 per share on revenue of just under $5 billion. This compares to the year-ago in period when GOOG reported earnings of $5.36 per share on revenue of $4.07 billion; if Google is able to match expectations, it would represent earnings growth of more than 21% over the previous year. In addition to top-line numbers, investors are likely to focus in on two key aspects of the earnings report; market share in the smartphone market and its plans for expansion in China [also read ETF Plays For China's Internet Boom].

The smartphone market is becoming an increasingly important component of Google’s operations; a variety of phones that use Google’s Android operation software have recently hit the market. The company currently has roughly 13% of smartphone subscribers compared to 9% in the middle of the first quarter, indicating that the market share is certainly growing. Some analysts believe that by 2013 mobile ad spending will more than triple to $1.56 billion, meaning that every point of market share GOOG picks up will translate into big earnings down the road.

In terms of China, investors will focus on how the company will use its internet license in the authoritarian country to grow earnings and recoup the market share lost to Chinese search firm when it appeared that Google may be locked out earlier this year. This is especially important as the U.S. market matures and Google must look abroad to provide earnings growth in the future. If GOOG pleases investors with bullish reports on these two fronts, it could heavily boost its stock and send a variety of technology ETFs soaring higher [also read Nine Twists On Sector ETF Investing].

Thursday’s ETF to watch is the First Trust Dow Jones Internet Index Fund (FDN). This ETF  tracks the Dow Jones Internet Index, a benchmark that follows companies which derive at least 50% of their annual sales/revenues from the internet. GOOG makes up the fund’s top holding with 8.6% of total assets, while internet giants (7%), eBay (5%) and Yahoo (5%) round out the top four. The fund is well diversified among market capitalization levels, with roughly one-fourth of total assets going to large caps and small caps and almost 30% to medium sized companies. FDN is one of the equity ETFs in positive territory on the year, posting a gain of about 4% to date in 2010 [see technical analysis of FDN here].

For more ETFs to watch, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.