2023-10-17 16:01:53 ET
Summary
- Internet funds face challenges in a weakening macro backdrop.
- First Trust Dow Jones Internet Index Fund ETF is a fund that tracks the Dow Jones Internet Composite Index?.
- The FDN ETF has a concentrated portfolio with heavy exposure to technology, posing risks in changing market conditions.
The Internet gave us access to everything; but it also gave everything access to us. - James Veitch.
Not all Internet funds are the same, but either way, all have the same problem of weakening momentum against a macro backdrop that looks increasingly challenged.
First Trust Dow Jones Internet Index Fund ETF (FDN) is an exchange-traded fund, or ETF, that tracks the Dow Jones Internet Composite Index?. The fund's primary objective is to mirror the performance and yield of this index, before accounting for its own fees and expenses.
The Dow Jones Internet Composite Index? is a float-adjusted, market capitalization-weighted index designed to represent the largest and most actively traded U.S. companies in the Internet industry. To be eligible for inclusion in this index, a stock must be listed on NYSE, NYSE MKT, or Nasdaq stock exchange, and meet specific criteria, such as generating a majority of its sales/revenues from the Internet, having a minimum trading history of three months, and possessing a minimum three-month average float-adjusted market capitalization of $100 million.
This is a good example of a part of the marketplace that looks like it will have a hard time going forward. What an incredible roundtrip.
FDN's Top Holdings
No surprises given the name of the fund what some of the largest holdings are here.
These holdings are subject to change due to the dynamic nature of the market and the fund's quarterly rebalancing. Amazon and Meta account for over 16% of the fund alone. These happen to be stocks I'm personally concerned about (less so Meta) given my own work on consumer spending going forward, but regardless it's clear that this is a fairly concentrated fund.
Sector Exposure
In terms of sector exposure, FDN is heavily concentrated in Information Technology, Communication Services, and Consumer Discretionary sectors. I really personally don't like the heavy Technology exposure here (and yes, I recognize it's an Internet fund). There's a lot of risk in tech names broadly here in my view, especially as we get closer to a recession.
Risks Involved
Investing in FDN comes with a host of risks. Being an index fund, it cannot take defensive positions in declining markets and must hold its securities regardless of their investment merit. The performance of FDN is heavily influenced by its top holdings, which means any negative impact on these companies could significantly affect the fund's value.
Moreover, the fund's focus on the Internet industry exposes it to specific sector risks, such as rapidly changing technologies, aggressive competition, and regulatory uncertainties. Additionally, market risks, such as general economic conditions, political events, and changes in interest rates, can also affect the fund's performance.
I believe current market conditions pose significant challenges for FDN. With inflation and interest rates soaring, tech stocks outside of the Magnificent 7 look like they can suffer meaningfully in the months ahead. Their performance clearly reflects this.
While on the surface one might think First Trust Dow Jones Internet Index Fund ETF has done well this year because of tech strength, the reality is clearly it hasn't over several, and momentum is looking weaker and weaker. I would avoid the FDN ETF personally. Maybe at some point after a dislocation it can be a good allocation, but there's nothing special about this part of the marketplace now to warrant a concentrated bet in my view.
For further details see:
FDN: Not The Place To Be Now