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ETF News And Commentary

The world's largest video streaming company – Netflix (NFLX - Analyst Report) – has badly been victimized by momentum stock sell-off in early April. This high-flying stock of 2013 dropped 24% from its record highs reached on March 4. This trend is expected to change following the strong earnings announcement for the first quarter and an optimistic outlook (read: The Momentum Stock Crash Puts These ETFs in Focus).

This is especially true as NFLX shares rose about 6.8% in after-hours trading on Monday driven by an earnings beat, robust subscriber gains and a bullish outlook.

Netflix Earnings in Focus

The company reported earnings per share of 86 cents, outpacing the Zacks Consensus Estimate of 83 cents and improving substantially from the year-ago earnings of 5 cents. Revenues climbed 24% year over year to $1.27 billion, in line with Zacks Consensus Estimate.

Netflix added 2.25 million domestic and 1.75 million international subscribers, thus having a total customer base of 48.4 million. The second season of its original show ‘House of Cards’, which debuted in February, attracted a huge number of subscribers during the quarter.

The company provided an upbeat guidance for the second quarter. It expects earnings per share to come in at $1.12, a penny above the Zacks Consensus Estimate. Stepped up subscriber growth, with the expected addition of 0.52 million in the U.S. and 0.94 million internationally, bodes well for the company.

Solid Outlook Ahead

Amid stiff competitive pressures, Netflix has maintained its lead in online video streaming as it continues to expand its original content offerings and plans to launch more television shows and movies (read: Guide to Internet ETFs).

These include new seasons of the Ricky Gervais series, Derek (expected to launch on May 30), Orange Is the New Black (expected to launch on June 6) and Hemlock Grove (expected to launch in summer); final season of The Killing (expected to launch in summer); and the animated comedy series BoJack Horseman (expected to launch in summer).

Further, the company expects this momentum to continue throughout this year and in the next with many other offerings such as a new slate of cartoons from DreamWorks Animation, a Marco Polo series from the Weinstein Co, a psychological thriller from the creators of Damages, Marvel‘s Daredevil, sci-fi drama Sense 8 from the Wachowskis, and an action drama series Narcos. These would be accretive to subscriber growth going forward.

Further, Netflix is seeking to expand in international markets, in particular Europe. If this wasn’t enough, the company raised the subscription price for new customers by a modest $1–$2 per month, indicating increased confidence in its content offerings that would likely drive revenues and profits higher.

Moreover, Netflix currently has a Zacks Rank #1 (Strong Buy), suggesting strong optimism in its growth story and smooth trading in the coming days (read: Technology ETFs: Pain or Gain Ahead?).

ETFs to Consider
 
Given this, investors might want to capitalize NFLX growth and the upcoming surge in its share price with lesser risk in the form of ETFs. For those investors, we have highlighted three ETFs with a higher allocation to Netflix and potential to be big movers in the coming days. These have a Zacks Rank of 2 or ‘Buy’ rating, suggesting that these would outperform in the coming months.

PowerShares Dynamic Media Portfolio ((PBS - ETF report))

The fund seeks to offer capital appreciation by investing in 31 media companies that are selected on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. It follows the Dynamic Media Intellidex Index.

Netflix occupies the seventh position in the basket with 4.21% of total assets. Within the media sector, Internet software & services make up for one-fifth of the portfolio alone while cable & satellite and broadcasting round off the next two spots with double-digit exposure (read: 3 Consumer Discretionary ETFs Set to Surge).

The ETF has amassed nearly $189 million in its asset base while trades in solid volume of roughly 201,000 shares a day. Expense ratio came in at 0.63%. The fund has lost nearly 9% year-to-date.

PowerShares Nasdaq Internet Portfolio ((PNQI - ETF report))

This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 100 stocks in its basket with AUM of $330.2 million while charging 60 bps in fees per year. It trades in moderate volume of more than 85,000 shares a day.

Netflix takes the ninth spot with 3.53% of assets. In terms of industrial exposure, Internet software & services makes up for more than two-third share in the basket, followed by Internet & catalog retail. PNQI is down 6% so far this year.

First Trust Dow Jones Internet Index ((FDN - ETF report))

This is one of the popular and liquid ETFs in the broad tech space with AUM of over $1.9 billion and average daily volume of about 485,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 42 bps in fees per year (see: all the Technology ETFs here).

Netflix occupies the tenth position in the basket with 3.40% share. From a sector look, Internet mobile applications account for more than half the portfolio while Internet retail accounts for 23% of assets. The ETF has lost nearly 4.2% year-to-date.

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