Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect networking companies to thrive over time as our growing population and developing economies demand more communication services, the PowerShares Dynamic Networking Portfolio ETF (NYSE: PXQ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is 0.63%. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed rather well, beating the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
More than a handful of networking-related companies had strong performances over the past year. Brocade Communications (Nasdaq: BRCD), up 42%, has been outperforming analyst estimates and buying back shares. Its CEO is preparing to leave, and some are hoping that the company will be acquired -- with IBM and EMC among those suggested as logical suitors. The company's growth rate has been shrinking in recent years, worrying some investors, but others are very hopeful about its growing involvement in cloud computing.
Network equipment specialist Ciena (Nasdaq: CIEN) surged 29% over the past year, though it's being challenged by the restrained spending of telecom giants and has lowered its expectations for the year. Still, telecom companies will be spending significantly at some point, and Ciena is poised to benefit. It has received both upgrades and downgrades recently from Wall Street, and has been unprofitable in recent years (though its losses have been shrinking).
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Fiber-optics component maker Finisar (Nasdaq: FNSR) sank 16%, for example, reporting weak results in its last quarter and pointing at sluggish demand in Europe and China and restrained telecom spending. On the plus side, the company has been investing in making its offerings more efficient, and when demand picks up, as it inevitably will, the company's performance should turn around.
Meanwhile, Tellabs (Nasdaq: TLAB), down 13%, has faced the same challenges as its peers, and it lost its CEO to cancer, as well. Its investors are waiting for telecoms to up their spending, but unlike investors in the other companies above, they're collecting a dividend while they wait. Tellabs' yield was recently a solid 2.3%. In a conference call after posting its last quarterly results, management pointed out that the company is focusing on profitability.
The big picture
Demand for networking isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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