Even though Internet stocks have recently been in a slump, there are a number of mutual fund companies poised to introduce their own Internet index funds.
There are only a handful of Internet funds and no Internet index funds on the market, so there are bragging rights at stake in a market whose players are desperately trying to differentiate themselves among thousands of funds.
Internet 100 Advisors of Arlington, Va. plans to manage two Internet index funds based on its own index, the Internet 100 Index. That fund is still in registration with the SEC. Two other companies, Investec Guinness Flight of Pasadena, Calif. and Reich & Tang of New York are taking steps to introduce Internet indexes. Those two companies are in a bidding war for the rights to Internet.com's Internet Stock Index, an already established Internet index.
Dow Jones also is apparently interested in fostering the creation of an Internet index fund based on its own Internet index which it created in February. Dow Jones will soon announce a licensing partner that will use the Dow Jones Internet Index for its name and investment strategy, a Dow Jones spokesperson said.
The Internet 100 Index, managed by Internet 100 Advisors, does not yet have a track record. But, it will invest in the 100 largest Internet-related companies, such as e-commerce companies, Web portals, financial services companies and software companies that deal with the Internet. The Dow Jones Internet Index, which is a composite of the Dow Jones Internet Commerce Index and the Dow Jones Internet Services Index, has returned 46 percent year-to-date ending June 1.
While some companies are embarking on Internet indexing, some industry observers are skeptical about the wisdom of these moves.
A lot of information is available on established companies such as those that make up the S&P 500 Index, so it is hard for any one portfolio manager to react with any more foresight than another fund manager, according to Andrew Guillette of Cerulli & Associates of Boston. Consequently, an index fund makes sense, he said. But, technology and Internet companies receive far less scrutiny because they are in relatively early stages of development. Therefore, a fund manager can trade on information he may have uncovered and another fund manager may not have, making indexing Internet stocks far less attractive, Guillette said.
"There's less of a need to construct an index," in the Internet sector, he said.
Indexing at this stage of Internet companies' developments is not a good idea since mergers and acquisitions are likely to continually change the landscape too much for an index to keep up, said Alexander Cheung, portfolio manager of the Monument Internet Fund, an actively-managed fund based in Bethesda, Md.
"Ten years from now, when the Internet industry begins its second stage, when the Internet economy takes shape, then (indexing) would be good," Cheung said. "It will become more like the S&P 500." Cheung said as an active manager, he will also be able to hedge his fund, an important tool while the sector is so volatile.