Investors were treated to the news this month that PayPal Holdings Inc (PYPL) would be spun off from Ebay Inc (EBAY) to create a massive $45 billion stand alone company. The fervor surrounding the successful IPO of PayPal stock, alongside a valuation surpassing its parent company, makes for an interesting investment case. While some may choose to own PayPal stock directly, others may be seeking to integrate this theme in their portfolio through a diversified exchange traded fund.
As both a financial and technology leader, PayPal has revolutionized the way money flows back and forth from individual consumers and businesses. As a result, it’s no surprise that this 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 Inc (V) alongside financial infrastructure names like Fiserv Inc (FISV). PYPL is a natural fit in this niche technology driven ETF and currently occupies 5.56% of the total portfolio.
The First Trust Dow Jones Internet Index Fund (FDN) is another fund designed to take advantage of top-tier companies engaged in social media, search engine, and online commerce. EBAY represented a significant holding in FDN prior to the debut of PYPL, and as such this new stock has managed to crack the top 10 holdings. PayPal stock (PYPL) makes up 3.40% of the FDN portfolio alongside momentum titans such as Amazon Inc (AMZN) and Facebook Inc (FB).
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, ADRs, and MLPs that have been spun off from a parent company. Paypal certainly meets the requirements to be included in this exchange traded fund and will likely be evaluated at a future rebalancing date (typically at the end of each quarter).
In addition, its worth noting that Van Eck just launched the Market Vectors Global Spin-Off ETF (SPUN), which tracks a broader index of global developed stocks. This ETF would likely follow a similar path of evaluating PYPL for inclusion at its next rebalancing date.
The Ark Web X.0 ETF (ARKW) is another fund that could be a possible landing pad for PayPal stock as well. This actively managed ETF tracks approximately 40-50 stocks affiliated with e-payments, cloud computing, big data, and other internet-related businesses. Those 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, yet is likely being evaluated as a potential candidate in the future.
The Bottom Line
By choosing an exchange-traded fund 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. However, the broader the index, the less likely that a single component will have a significant impact on total return. That can be a good or bad thing depending on your views towards risk and reward.
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No position in any of the securities mentioned at the time of publication. Â Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
