Internet ETF Makes Debut in Bad Market

What's more troubling is that Internet shares have fared even worse. The Nasdaq Internet Index, which launched in late November, has dropped about 12% year to date. (It's off 12% since its inception, too.)

That makes the timing of a new Internet exchange-traded fund anybody's guess. The PowerShares Nasdaq Internet Portfolio (PNQI) listed on the Nasdaq Thursday. It's based on the Nasdaq Internet Index, which tracks the performance of the largest and most liquid U.S.-listed Internet companies. The index has rallied impressively off its March lows, but it's a crap shoot as to whether or not it can sustain that run.

Of greater concern is that sector ETFs are tricky enough, especially those in the volatile tech space. To put it in perspective, the average annual volatility of tech is about double that of large-cap growth funds.

If you're a retail investor and you want to sleep at night, tech-sector ETFs should be allocated to sparingly at best. That goes double for something as granular as PowerShares Nasdaq Internet.

"It's another tool in an investor's toolbox, but then how many hammers does he need?" says John Schloegel, vice president of investment strategies at Capital Cities Asset Management. "You don't have to drill down to that level."

True, PowerShares Nasdaq Internet will give you exposure to heavyweights like Google (GOOG), Amazon.com (AMZN) and eBay (EBAY). But bear in mind you're also getting a smorgasbord of smaller, riskier names. The Nasdaq Internet Index also counts Bidz.com (BIDZ), InfoSpace (INSP) and Zix (ZIX) among its components. The bigger-cap companies get more weight in the index, but you're still buying the littler guys, too.

Besides, if you're truly bullish on Internet stocks, there are alterative ways to make a play that also offer some diversification. If the Internet sector does indeed gain steam, Google's likely to lead the charge. The iShares Dow Jones US Technology ETF (IYW) will get you some Google, as well as Apple (AAPL), Cisco Systems (CSCO) and Microsoft (MSFT), among others. And even with that, as a sector ETF, you'd want to allocate lightly.

Lastly, let's not forget about the good ol' Cubes, the PowerShares QQQ ETF (QQQQ), which tracks the largest nonfinancial stocks on the Nasdaq. With roughly 60% of its holdings in tech, it's a natural for regular folk who want some tech exposure.

Active traders and professionals might benefit from having the PowerShares Nasdaq Internet ETF in their toolboxes, but it makes little sense for buy-and-hold types. The outlook for tech is murky enough without placing such a targeted bet on such a small slice of the sector.

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