Industry Updates

Product Focus: First Trust Internet ETF

Scott Longley

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The First Trust Dow Jones Internet UCITS ETF (FDN), is based on the Dow Jones Internet Composite Index. The index is designed to measure the performance of the 40 largest and most actively traded stocks of US companies in the internet sectors. ETF Stream spoke to Derek Fulton, chief executive at First Trust, to give us an overview of the fund which, as he says, seeks investment results that correspond generally to the price and yield and "is not just a tech fund". He adds: "While it offers exposure to the four mega-cap FANG stocks, it also enables investors to remain diversified to other internet revenue generating companies within the universe. Utilising access to these stocks via a UCITS collective investment scheme can offer potential cost efficiencies."

What index does the product track?

The Dow Jones Internet Composite Index is designed to measure the performance of the 40 largest and most actively traded stocks of U.S companies in the Internet sectors. To be included in the selection universe of the index, a company must generate at least 50% of its annual sales/revenues from the internet. Stocks must also have a three-month average float-adjusted market cap of at least $100m, a three-month average closing price of above $10 if it is not currently in the index and have sufficient trading activity to pass the required liquidity tests. The index composition is reviewed each quarter.

Why now for an internet-themed ETF?

Over the history of humankind, few technologies have resulted in widespread social and economic change in such a relatively short period of time as the internet. With access to the internet being available almost everywhere today and with the enormous growth in the application of internet technology, including social media, audio and video streaming, countless apps, online shopping and online holidays - the potential future revenues generated from the internet could be significant. As this global internet evolutions continues the fund will not only help investors unlock the potential FANG opportunities, but also provide a good level of diversification to a wide range of other internet revenue generating stocks with the index solution.

What should investors bear in mind in terms of risk when looking at this fund?

As with any thematic investing products, there are potential market, theme and value risks. For information technology companies these could include: short product life cycles, fierce competition, aggressive pricing and reduced profit margins, loss of patent, copyright and trademark protections, cyclical market patterns, evolving industry standards and frequent new product introductions. Certain companies may be smaller and less experienced companies, with limited product lines, markets or financial resources. Information technology company stocks, especially those which are Internet related, have experienced extreme price and volume fluctuations that are often unrelated to their operating performance. However, with the fund being part of the internet evolution and in investing in companies that gain at least 50% of their revenues/sales from the internet; the universe will rebalance and those that do not continue gain this level of revenues/sales will be replaced by others who can and meet the universe criteria, explained above. Of course, the fund also bears with it all the risks common to any all-equity investment as well.

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