Internet ETF Thrives on Digital Shift

NEW YORK (TheStreet) -- Google(GOOG) is grabbing headlines as the company is expected to shutter its Chinese Web search operations in the very near future.

Shares have slipped and several ETFs are affected, including First Trust Dow Jones Internet Index(FDN), which has 8.8% of assets in Google, the fund's No. 1 holding.

Today's headlines may be negative, but the trend away from physical production and transportation towards digital content and delivery continues, as does the shift towards knowledge-based industries that can quickly adapt in a rapidly changing world.

The latest victim is the post office. The relatively inefficient company is unable to adapt to the changes in the economy and carries an enormous burden of legacy pension costs. The strategy here, as with other government services, is to reduce service and increase fees and taxes, in order to make good on generous pension promises. First to go may be Saturday delivery.

On the other side is an army of businesses ready to grab market share. First in line, obviously, are direct competitors such as FedEx(FDX) and UPS(UPS). Right behind them, however, is a phalanx of content delivery firms.

At 6.1% of FDN, Amazon.com(AMZN) is blazing the path towards the electronic delivery of books, via its Kindle service. Apple(AAPL) will join the competition on April 3, when it launches the iPad and begins selling books in its iBook store. Post office competitors may pick up some business, but they are just as likely to lose some business as content increasingly goes digital.

Another example is Netflix(NFLX). The company, which makes up 2.7% of FDN, is unlikely to rely on U.S. Postal Service competitors if Saturday delivery is terminated. Instead, the firm and its customers are likely to accelerate the shift toward streaming movies and video games.

Besides content, there are the millions of letters, bills and advertisements sent through the mail. Each increase in the cost of mail, be it service or cost related, will entice more customers to go paperless. For instance, IAC/InterActiveCorp(IACI), which accounts for 2.4% of FDN, owns a firm called Evite, which allows users to send online invitations.