Investors were treated to the news this month that PayPal (PYPL) would be spun off from Ebay (EBAY) to create a massive $46 billion (by market capitalization) standalone company.
The fervor surrounding the successful IPO, alongside a valuation surpassing its parent company, makes for an interesting investment case.
While some may choose to own PYPL stock directly, others may seek to integrate this theme in their portfolio through a diversified exchange-traded fund.
#1 PureFunds ISE Mobile Payments ETF (IPAY): PayPal has revolutionized the way money flows back and forth from individual consumers and businesses, so it’s no surprise that PayPal stock is a top holding in the newly released PureFunds ISE Mobile Payments ETF (IPAY). IPAY tracks 30 companies engaged in mobile payment options in both digital and electronic formats. This index includes established credit card companies such as Visa (V) alongside financial infrastructure names like Fiserv (FISV). PYPL is a natural fit in this niche technology-driven ETF and currently occupies 5.7% of the total portfolio.
#2 First Trust Dow Jones Internet Index Fund (FDN): The First Trust Dow Jones Internet Index Fund (FDN) is another fund designed to take advantage of top-tier companies engaged in social, search and online commerce. EBAY represented a significant holding in FDN prior to the debut of PayPal stock, and as such this new stock has managed to crack the top 10 holdings. PYPL makes up 3.5% of the FDN portfolio alongside momentum titans such as Amazon (AMZN) and Facebook (FB).
#3 Guggenheim Spin-Off ETF (CSD): Another index that could ultimately land a large allocation to PYPL is the Guggenheim Spin-Off ETF (CSD). This fund tracks a passive index of 40 U.S.-listed stocks, American depositary receipts and master limited partnerships that have spun off from a parent company. PayPal certainly meets the requirements to be included in this ETF and will likely be evaluated at a future rebalancing date (typically at the end of each quarter).
#4 Market Vectors Global Spin-Off ETF (SPUN): A quickie, but worth a mention, is the recently launched Market Vectors Global Spin-Off ETF (SPUN), which tracks a broader index of globally developed stocks. This ETF would likely follow a similar path of evaluating PYPL for inclusion at its next rebalancing date.
#5 Ark Web X.0 ETF (ARKW): The Ark Web X.0 ETF (ARKW) is another fund that could be a possible landing pad for PYPL as well. This actively managed ETF tracks approximately 40 to 50 stocks affiliated with e-payments, cloud computing, big data and other Internet-related businesses. These investment parameters certainly seem to align with the core PayPal business model. With ARKW, the manager has full discretion to add or remove any stocks within the portfolio, according to their fundamental research. PYPL is not currently included in this mix, but it’s probably being evaluated as a potential candidate in the future.
Bottom Line
By choosing an ETF over a specific stock, you reap the benefits of sector or industry diversification to help mitigate specific business risks. That allows you to participate in the PayPal theme without betting on the performance of an individual company.
This stock will also likely make its way into traditional growth and broad-market indices over time as their review and rebalancing schedules take effect.
The broader the index, however, the less likely it is that a single component will have a significant impact on total return.
That can be a good or bad thing depending on your views toward risk and reward.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. To get more investor insights from FMD Capital, visit their blog.
