Tech stocks and related ETFs have taken a beating this year as investors, trying to gauge the strength of the U.S. economy, have fled momentum stocks in favor of more defensive sector such as utilities. However, David Kotok, chief investment officer of Cumberland Advisors, says he’s bullish on the “big data” tech sector, and is particularly keen on the First Trust Dow Jones Internet Fund (FDN | A-95).
The $1.7 billion fund is the biggest and most liquid in the segment, and Kotok reckons it’s the perfect vehicle to benefit from what he sees as the beginning of a multiyear trend that should benefit investors willing to stomach the inherent volatility. Kotok was speaking about his bullishness on “big data” to ETF.com staff writer Hung Tran on the sidelines of a conference in New York City on how investors can better manage currency risk in the ETF space.
ETF.com: Why are you bullish on FDN right now, which currently holds Google, Facebook and LinkedIn, to name a few Internet-related companies?
Kotok: I was a doubter of the business models for LinkedIn, Facebook and Twitter, and now I am a user of those. So I am a converted luddite; they’re the worst kinds. The next 10 years takes the size of this sector and world commerce to levels unseen.
I don’t have any idea what they will look like, and I don’t know if I can see through the lenses of my Google glasses, and when I talk to somebody, I won’t need an earpiece because the glasses will hear me.
But as far as I’m concerned, to not have a core piece of exposure in this sector is a mistake. How much weight? How much volatility can you stand? Those are separate questions. You can try to pick a single winner in a company but I don’t know how to do that.
So I need to be in the landscape and I need to be in FDN because it gets me the big players in a basket and I have to stomach the volatility, which I will do. But I think the major trend is in place for years and maybe even decades.
ETF.com: What major trends are you referring to?
Kotok: I think the tech sector will get a capital-investment piece from the gradual economic recovery worldwide.
And it will get a second capital-investment piece from the gradual restoration of balance in state and local governments, which are big buyers of software, hardware and services. For the past five or six years, they’ve had contractions in their budgets, but that’s now gradually changing.
When you start to add the government back into the tech sector as a buyer on top of gradual economic recovery whereby private companies are looking for productivity gains, you’ve got a big kick, and that kick is terrific for “big data” and social networking companies.
ETF.com: How do you define “big data” companies?
Kotok: The words “big data” means different things to different people. I don’t like cliches, and “big data” is a cliche, and at this point it is an unclear cliche. But if you think about it, any transaction that anybody does in the electronic-based commercial area is establishing a huge amount of information.
Google can track transactional pricing in real time better than any U.S. statistical agency, which are years behind. How are they doing it? They have profiles on every single item purchased, purchasers, vendors and distributors.
All of that is data. Not only that, but the capacity to identify patterns and then convert that in ways in which to induce consumers to do business, and reward consumers for providing the data by having vendors know exactly what the consumers like and want is remarkable!
You’re talking about in the past having to go into the department store to buy a shirt. Here, you don’t even have to try it on or sort through the colors. It’s all done for you.
ETF.com: FDN has tumbled to a loss of more than 8 percent year-to-date thanks to the big sell-off in tech-related stocks in late March. Is it time to get back into this ETF and its portfolio of hot Internet names?
Kotok: Of course it’s been beaten down. Nothing goes up in a straight line. We bought FDN in the last year or two, and we’ve watched a lot of volatility around the ETF. But we made the decision to not trade it. My sense is that the recovery in FDN will also be very robust because the direction of the underlying securities as a group is robust