ETFs for Dipping a Toe Into Amazon

My main concern with Amazon is the firm's valuation. Even if it can increase 2010 earnings 30% above consensus estimates -- three of its last four quarterly earnings surprised by more than 30% to the upside -- that assume 25% growth already, shares would still be trading at nearly 40 times 2010 earnings. This is a bullish story for a bullish market, but a slip up in either could batter shares.

For ETF investors interested in Amazon-weighted funds, the Internet HOLDRs (HHH) has 40.3% of assets in Amazon, PowerShares Nasdaq Internet (PNQI) has 7.3% of assets in Amazon; and First Trust Dow Jones Internet Index (FDN) has 6.3% of assets in Amazon.

With another 20% in eBay (EBAY) and 15% in Yahoo! (YHOO), HHH is too concentrated for my tastes. PNQI and FDN have very similar portfolios, but FDN has greater trading volume, making it my preferred choice for an Amazon-weighted ETF.

Another reason I like FDN (and PNQI, if it had more volume) is that the fund holds other Internet retailers that are changing the face of retail, in addition to the firms that supply the infrastructure and support services for these companies. The larger the fight between Amazon and Apple, for instance, the more money is likely to end up in the hands of many of the firms that make up FDN, which is why I continue to hold it in my ETF Action Newsletter.

>To order reprints of this article, click here: Reprints