Wednesday’s ETF To Watch: Internet HOLDRS (HHH)

by on July 27, 2011 | ETFs Mentioned:

Although worries over the debt ceiling continue to plague equity markets, some sectors of the financial world have been given a boost by quality earnings reports from a variety of firms. Most recently, investors received good news from casino operator Las Vegas Sands which rose more than 5% in after hours trading, while others focused in on a good report from Amazon in order to get a better perspective on the broader consumer side of the economy. While the firm saw earnings slip from the year ago period, the figure was still sharply ahead of Wall Street estimates, helping to boost shares of the company in yesterday’s after-hours session by close to 6%.

The Seattle-based company beat estimates by six cents a share when it reported profits of 41 cents/share for the most recent quarter. Even more impressively was the revenue increase when compared to the year ago period; sales jumped by 51% to $9.91 billion, easily beating consensus estimates which called for revenues of $9.37 billion. Growth was especially encouraging in the media segment which grew by 27%, as well as the Web Service segment– which is lumped in with the ‘other’ category for Amazon– which saw revenues surge by close to 75% in the quarter [see Internet ETFs here].

While the revenue growth is encouraging, some investors are growing concerned over the company’s low margin and the multitude of projects that the firm is taking on. Operating margins came in at just 2% for the most recent quarter, suggesting that most of Amazon’s profit run perilously close to the breakeven level, not exactly encouraging should the company hit a snag later this year. Additionally, the firm is believed to be developing a tablet device as well in order to compete with the likes of the iPad. This could prove to be a costly exercise, especially if consumers do not stray from Apple products for this slice of the market, potentially creating headwinds for the company in the near future [Seven Surprising ETF Holdings].

Thanks to this key earnings report, investors should look for the Internet HOLDRS (HHH) to be in focus throughout today’s trading. The fund affords a gargantuan amount of its holdings to the internet retailer, giving just under 44% of the total assets to AMZN. Furthermore, just 11 other companies are in the fund suggesting that HHH is chiefly driven by the performance of Thanks to this heavy concentration, investors should look to HHH today in order to see how the fund responds to AMZN’s estimate beating performance and if the company sees its after-hours performance carry into today’s trading session. As a result, investors should look for HHH to start the day sharply higher than its close yesterday, possibly helping the fund to obtain a 10% year-to-date gain by the end of the day [see more charts of HHH here].

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Disclosure: No positions at time of writing.