First Trust's DJ Internet Index ETF -- Diamond in the Rough

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Includes: FDN, GOOG, HHH
by: David Fry

There are so many new ETFs being issued that it's not surprising some well-structured and much-needed issues get lost in the shuffle. If you're a fan of Google Inc. (NASDAQ:GOOG) and the internet sector, you're no doubt aware that Internet HOLDRS (NYSE:HHH) is structured as a trust and can't add any new names to its holdings. Therefore, GOOG, issued after its release, is not a HHH constituent. But, First Trust's DJ Internet Index ETF (NYSEARCA:FDN) is based on the DJ Internet Index, and as such has GOOG as a heavily weighted component. Listed below are the top 10 holdings of FDN:

David Frys Market Outlook

Listed below are the constituents of HHH courtesy of the AMEX:

David Frys Market Outlook

You can readily see the differences in weightings. FDN has a more contemporary weighting and constituent base than HHH. You can get lucky with HHH if eBay Inc. (NASDAQ:EBAY) has, as it did today, a good performing day. On the other hand GOOG and EBAY combine to hold over 20% of FDN.

So what's the problem? No one knows about FDN, as evidenced by the fact that the average daily volume is less than 8K shares, while HHH is over 250K shares. Why is this? Because institutions may be playing HHH and GOOG together either by shorting the former and being long the latter or perhaps being long both. Further, FDN's lack of volume may be the result of both too much ETF issuance and too little investor interest in the stock market, as evidenced by recent low flows to mutual funds and lack of dynamic transaction volume from online brokers.

So, is FDN a diamond in the rough that's been lost in the avalanche of new ETF issues? If you believe in proper internet index structure, yes!

David Frys Market Outlook

David Frys Market Outlook

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