The latest ETF launch to get the once over from the ETF Stream product Panel is the First Trust Dow Jones Internet UCITS fund launched towards the end of June. Having a look under the hood are Nicolas Rabener, managing director at Factor Research, Peter Sleep, senior portfolio manager at 7IM, Oliver Smith, portfolio manager at IG Group and Mark Northway at Sparrows Capital. Below is what they had to say, but first up we look at the fund in question and what the company has to say about it.
What First Trust says:
The First Trust Dow Jones Internet UCITS ETF will invest in the Dow Jones Internet Composite Index. The fund offers exposure to the four mega-cap FANG stocks and enables investors to remain diversified to other internet revenue generating companies within the universe. Derek Fulton, chief executive at First Trust Global Portfolios said: "We are continuing to witness exponential global growth in internet usage. This new, highly liquid ETF provides exposure to this burgeoning asset class in a transparent UCITS structure. Tracking the Dow Jones Internet Composite Index, FDN offers exposure to FANG as well as driving alpha from other web-based companies."
What the panel says:
Nicolas Rabener, Factor Research
First Trust's launch of the Dow Jones Internet UCITS ETF captures the zeitgeist of seemingly unprecedented growth opportunities for a few select technology companies, namely the FANG stocks. The UCITS ETF aims to replicate the success of the US ETF on the same index, which manages $9 billion. The TER at 0.55% is not particular competitive, e.g. similar technology-focused products are IUIT from iShares at 0.15% and XLKS from Invesco at 0.14%. Given the significant outperformance of growth over value stocks in recent years, it will be interesting to reflect in a few years, if this launch marked the high point.
Peter Sleep, senior portfolio manager, 7IM
FDN has been around in the US for 12 years and has gathered about $9bn in assets due to its spectacular performance in that period. It is no secret that money will chase performance and this ETF certainly has had great momentum over the last few years and grown strongly. In that period it has shown an annual return of16.9%, after fees, nearly double the S&P's return over that period of 8.82% and also comfortably beating the returns of the S&P Information Technology Sector which returned 13.5% per annum over the same period. I am not a fan of thematic ETFs as they often seem to come to market after a period of strong performance, near the peak, only to disappoint investors afterwards. I cannot say that for the US version of FDN, given its vintage, but the cautious investor in me worries about the European version. If an investor wants targeted exposure to the US internet sector this may be a fund to consider. It does what it says on the tin. It would be wrong to think of this as an IT sector ETF as there is considerable performance differential (see above). If you are being technical, the ex-ante tracking error of FDN to the S&P 500 IT sector is over 7%, which is quite large, suggesting that this ETF offers something different to a cheaper US IT sector ETF. This becomes clear when you consider that the FDN does not have IT sector stalwarts like Apple or Microsoft, and much larger holdings of companies like Amazon, Netflix and Facebook… which make up 25% of the fund. Unsurprisingly this ties the fortune of the ETF to a relatively small number of stocks, or as my quant colleagues would say, there is a relatively high degree of undiversified company specific risk. For this reason, I believe the ETF should only sit in well diversified portfolios
Oliver Smith, IG Portfolios
With 40% in the top five holdings, this is a concentrated bet on the continuing rise of some of the US market's most exciting and most expensive tech stocks. Position-wise it offers more diversification than the recently launched 10 stock FANG+ Index and is racier than a simple NASDAQ tracker. As someone who is wary of growth stock valuations, this wouldn't be top of my buy list, but the product is a good one and the growth of the internet, shifting sales from high-street to online, is a huge structural growth story. The largest internet-focused firms have great brand strength and many are immensely profitable in a space where it is increasingly difficult to get to compete. That said, the share price growth of these companies is not inevitable; an interest rate spike or intervention from anti-trust regulators could dampen investor spirits.
Mark Northway, Sparrows Capital
This First Trust UCITs is the first European-domiciled product tracking the Dow Jones Internet Composite Index. The various technology ETFs have differing approaches to the sector. Some are broadly inclusive, including hardware, software, telecommunications, technology manufacturing equipment, and information technology services, whilst others focus on specific elements of the technology chain. The First Trust product focuses only on internet stocks, defined as companies at least 50% of whose revenues derive from the internet. First Trust Dow Jones Internet comprises 42 holdings, and although it takes market capitalization into account in weighting those stocks, it also looks at average share volume and accounts for float-adjusted factors. That's especially important with internet stocks, many of which release only a small portion of their outstanding shares in initial public offerings. Comparing the performance of a broad-based technology offering ETF, such as the SPDR Technology Select Sector (XLK US Equity) with the First Trust Dow Jones Internet US ETF (FDN US Equity), we find the following: The FDN outperforms the broad-based XLK by about 260% over the last 12 years or about 5% annualised per year with about similar levels of peak-to-trough drawdown over the 2008 crisis. However, FDN does exhibit higher month-to-month variations in returns (20.4% vs 16.6% annualised standard deviation for FDN and XLK, respectively), which would be expected from such a niche sector offering. We question whether there is sufficient European demand to sustain this highly specialised and concentrated sectoral offering. We are concerned that investment in the vehicle will be highly speculative, resulting in substantial percentage redemptions in any reversal of the FANG phenomenon.
