An Overlooked Internet ETF (XWEB)

In a year in which the Nasdaq Composite is soaring to record heights thanks in large part to big-name internet stocks, it is easy for investors to focus on the largest internet exchange-traded funds (ETFs). An overlooked though still credible option among internet ETFs is the SPDR S&P Internet ETF (XWEB), which turns one year old later this month. XWEB "seeks to track a modified equal-weighted index which provides the potential for unconcentrated industry exposure across large, mid and small cap stocks," according to sponsor State Street Global Advisors.

As an equal-weight ETF, XWEB goes about its business in significantly different fashion than rival internet ETFs. In the current environment, one in which the largest internet stocks such as, Inc. (AMZN) and Facebook, Inc. (FB) are driving the sector higher, XWEB's methodology can be a drawback. (See also: 3 Types of Indexing for ETF Success.)

The weighted average market value of XWEB's 62 holdings is $41.2 billion, or less than 10 percent of Amazon's market capitalization. Despite not focusing on the biggest internet names, XWEB has returned an admirable 14.5 percent. Plus, an advantage of the equal-weight methodology is that, if the biggest internet names experience some retrenchment, XWEB is apt to perform less poorly than its cap-weighted peers.

XWEB, which tracks the S&P Internet Select Industry Index, does not even feature Amazon or Facebook among its top 10 holdings. Some of the ETF's most recognizable, larger holdings include Wayfair Inc. (W), Etsy, Inc. (ETSY), Zillow Group, Inc. (Z) and Twitter, Inc. (TWTR). The ETF devotes just over two-thirds of its weight to internet software and services providers, with the remainder of its lineup devoted to more pure e-commerce names. (See also: Big Money Flows Into Big Tech ETFs.)

Two issues currently confound XWEB. First, investors mulling internet exposure via ETFs are likely to be seduced by cap-weighted funds with large allocations to the industry's biggest stocks because that is the strategy proving most rewarding this year. Second, XWEB's small assets under management tally (just $3.29 million) and its light average daily volume could scare some investors away. Fortunately, XWE's holdings are, for the most part, heavily traded and highly liquid – traits that can keep the ETF's spreads somewhat tight. XWEB charges 0.35 percent per year, or $35 on a $10,000 investment. (See also: What Are Some of the Most Popular ETFs That Track the Internet Sector?)