NEW YORK (
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
, 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
. Right behind them, however, is a phalanx of content delivery firms.
At 6.1% of FDN,
is blazing the path towards the electronic delivery of books, via its Kindle service.
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
. 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,
, which accounts for 2.4% of FDN, owns a firm called Evite, which allows users to send online invitations.
While many firms in FDN can find ways to cut costs via the Internet, or help other companies become more efficient, the fund is also packed with the infrastructure and service firms that build and maintain the Internet.
, for instance, has recently tested a 100-gigabit router with
. That bandwidth will be necessary as more and more consumers stream movies and television to their computers and TVs.
Investors have a choice besides FDN in the Internet space: it's
PowerShares Nasdaq Internet Portfolio
. However, the fund trades only 10,000 shares per day and has just $15 million in assets.
PNQI has a large position in
that has grown to its largest single position, 9.2% of assets, after the firm rallied more than 50% in the wake of Google's Jan. 12 announcement that it may leave China.
FDN has no exposure to BIDU, and the difference in this holding has meant FDN underperformed PNQI by about 1.5% since Google's announcement. That small advantage isn't worth the drawbacks of low volume.
Saturday delivery isn't crucial to the mail business. The post office will still process mail on the day and losses will be small. This one service change isn't the end of the story, though. The problems at the organization go deeper and will take longer to solve. Saturday delivery will likely be the first casualty in a multi-year reorganization.
And what happens with the U.S. Postal Service is a microcosm of the larger economy, which is also reorganizing itself in the wake of the worst financial crisis since the Great Depression. Besides cost cutting, the firms in FDN are well-positioned financially due to much lower average debt levels. Whatever the day to day headlines deliver, these long-term fundamentals are working in the sector's favor.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion owned the First Trust Dow Jones Internet Index.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.