XLK Vs. FDN What Is The Difference?

| About: First Trust (FDN)

Summary

A follow on from my October 3rd article on technology ETFs.

A comparison of XLK versus FDN to check for compatibility as a holding alongside with XLK.

A recommendation how FDN can complement a holding in XLK.

On October 3rd I published an article in response to the September 19th an article by Matt Bohlsen (which you can find here) in which I covered the Technology Select Sector SPDR ETF (XLK) and how it relates to 4 other specialty technology ETFs; the iShares PHLX SOX Semiconductor Sector Index ETF (NASDAQ:SOXX), First Trust Cloud Computing ETF (NASDAQ:SKYY), Global X Internet of Things Thematic ETF (NASDAQ:SNSR) and PureFunds ISE Cyber Security ETF (NYSEARCA:HACK). In the comments section of that article user "jazznut" asked about the First Trust Dow Jones Internet ETF (FDN). I do not know much about this ETF myself so I decided to change that with this article! Enjoy…………….

I will follow the same format of my last article as I analyzed XLK and the 4 other ETFs. I will look at the total percentage of the top 10 and top 20 holdings in FDN and XLK, the degree overlap between them, and finally the structure of the ETFs and some other factors so that we can see how they relate to each other.

The Fees and Number of Holdings:

The first thing I took a look at was the fees and the number of holdings to get a better sense of the size of each ETF and how much it will cost you to hold them.

ETF Name:

Expense Ratio:

Number of Holdings:

First Trust Dow Jones Internet Index (FDN)

0.54%

42

Technology Select Sector SPDR Fund (XLK)

0.14%

74

Obviously the clear winner is XLK in terms of fees as it is significantly cheaper than FDN. XLK also has almost twice the number of holdings giving an investor greater diversity. So with XLK being both cheaper and more diverse and considering that both are "tech" ETFS what are you getting out of FDN? Let's take a look at the actual holdings in more detail.

Holding Percentage of Top 10 and Top 20 Holdings Per Fund:

I took a look at how much each fund held as a percentage of the entire fund in the top 10 holdings and the top 20 holdings to get a sense of how diversified they really are which will also be important as part of the analysis in the next section when we look at the overlap between the funds.

ETF Name:

Top 10 Holdings:

Top 11-20 Holdings:

Top 10 and Top 11-20 Together:

First Trust Dow Jones Internet Index

51.43%

23.21%

74.64%

Technology Select Sector SPDR Fund

60.45%

18.61%

79.06%

XLK is more top ten heavy than FDN but in the end it is really a wash between the two ETFs as both have between 75% to 80% of their value in the top 20 holdings.

Like in my last article I want to take a look at the three holdings in each ETF. XLK has more than 33% of the ETF's value amongst its holdings in: Apple, Microsoft and Facebook. FDN is a lot less heavily concentrated with the top three holdings only accounting for 21.78% of the ETF's value amongst its top three holdings in Facebook, Amazon and Netflix.

Overlap and Coverage Between the Funds:

So let's move on to look at how much overlap is there between the FDN and XLK. Before I looked at this I suspected that there would be quite a lot of overlap between the two funds but let's see what is going on here. The chart below covers how many of the same top ten stocks in FDN are already a part of XLK:

ETF Name:

Top 10 in XLK:

First Trust Dow Jones Internet Index

3

Only three holdings overlap. Let's look at the top 20 holdings in each fund and how much of an overlap in terms of the number of holdings:

ETF Name:

Top 20 in XLK:

First Trust Dow Jones Internet Index

4

This is good, there are only 4 overlapping holdings in the top 20 holdings between FDN and XLK. I am surprised as I had expected more of an overlap. So now let's do a more detailed deep drive and look at the overlap across the entire fund in terms of the percentage of each holding and how each fund ranks them up. The chart below covers this looking at all of XLK's 74 holdings and FDN's 42 holdings in detail.

Holding Name:

Rank in XLK:

XLK Holding %age:

Rank in FND:

FND Holding %age:

Facebook Inc (FB)

3

7.44%

1

8.35%

Alphabet Inc (GOOGL)

4

5.09%

5

4.97%

Alphabet Inc (GOOG)

5

5.04%

6

4.95%

PayPal Holdings Inc (PYPL)

20

1.32%

4

5.20%

Salesforce.Com Inc (CRM)

21

1.21%

7

4.73%

eBay Inc (EBAY)

27

0.72%

8

4.06%

Citrix Systems Inc (CTXS)

57

0.21%

12

2.47%

Juniper Networks Inc (JNPR)

58

0.21%

14

2.43%

Verisign Inc (VRSN)

67

0.18%

16

2.30%

Akamai Technologies Inc (AKAM)

69

0.16%

17

2.27%

Across both funds there are only 10 overlapping holdings. If you were to own both you would be heavy on Facebook and Google but other than that there is not a lot of over exposure as most of the holdings that overlap in are really lightly weighted in XLK.

While we are looking at holdings, let me make a quick aside here to cover a point that will be of interest to some readers. The famous FANG stocks are without argument the current market darlings and given that I thought I would make a note on how each ETF covers the FANG stocks:

Holding:

FDN Holding %age:

XLK Holding %age:

Facebook Inc

8.35%

7.44%

Amazon.com Inc (AMZN)

8.15%

0%

Netflix Inc (NFLX)

5.28%

0%

Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)

9.92%

10.13%

As you can see FDN is far more "FANGy" compared to XLK which is "FA" only, which I could imagine is just "blah" for someone who wants to own the FANG stocks!

Fund Structure / Investment Philosophy:

Having reviewed the overlap and discovering that both FDN's overlap is acceptable let's take a look at the structure and investment philosophy of FDN and XLK.

XLK is a broad based index fund and focuses on the following industries as noted in their prospectus:

  1. Technology Hardware
  2. Storage and Peripherals
  3. Software
  4. Diversified Telecommunication Services
  5. Communications Equipment
  6. Semiconductors and Semiconductor Equipment
  7. Internet Software and Services
  8. IT Services
  9. Electronic Equipment
  10. Instruments and Components
  11. Wireless Telecommunications Services

All the components in XLK must be S&P 500 companies so you are only going to have the biggest and most "mature" firms represented. This also means that the fund's holdings are all US companies.

According to FDN's prospectus:

The First Trust Dow Jones Index Fund seeks investment results that correspond generally to the price and yield of an equity index called the Dow Jones Internet Composite Index.

There were no further details in the prospectus around how this index was structured so I had to go and look that up elsewhere and I found this:

The index is designed to measure the performance of the 40 largest and most actively traded stocks of US companies in the internet industry. To be eligible for the index a company must derive at least 50% of cash flows from the internet.

So basically FDN tracks an capital weighted index of US companies of which I would expect most companies are going to be S&P 500 constituents thus the universe of eligible holdings similar to the pool of companies from which XLK draws from.

Taking a look at which sectors each fund covers we see the following (as per ETFdb.com):

Sector:

XLK:

FDN:

Technology:

90.03%

67.18%

Consumer Cyclical:

20.81%

Financials:

5.45%

Telecommunications:

7.95%

3.28%

Healthcare:

3.23%

Cash:

0.01%

0.02%

FDN offers a more diversity beyond just technology with some major holdings in consumer focused companies like Expedia (NASDAQ:EXPE) (2.96% of the ETF), TripAdvisor (NASDAQ:TRIP) (1.60% of the ETF) and Groupon (NASDAQ:GRPN) (1.31% of the ETF). There are also some large financial holdings in FDN such as TD Ameritrade (NASDAQ:AMTD) (2.78% of the ETF) and E-Trade Financial Corp (NASDAQ:ETFC) (2.68% of the ETF). Finally there is also a little bit of healthcare as well with -for example- Allscripts Healthcare Solutions (NASDAQ:MDRX) weighing in at 1.36% of the ETF.

Finally I wanted to take a look at the market capitalization of the companies within each ETF (as per ETFDB.com):

Market Capitalization:

XLK:

FDN:

Large:

95.49%

52.38%

Mid:

4.49%

26.79%

Small:

0%

14.55%

Micro:

0%

6.24%

XLK is very concentrated in large caps as to be expected given that the all their holdings must come from S&P 500 constituents. I was surprised that FDN has some small and microcap holdings as the index is based on the 40 largest and most active internet stocks.

(As a note I checked through the holdings on Google Finance to try to find which of the holdings are "microcap" (a market cap of less than $300 million) and the smallest holdings in FDN are all over $1 billion in market cap but I cannot understand what ETFdb.com considers "microcap". A check on ETF.com reveals microcap holdings as well but in a differing amount and there are no details on how this is measured. However this is the best data available at this point in time).

Now that we have taken a look at the contents of the funds let's look at the AUM, age of funds and trading volumes.

Criteria:

XLK:

FDN:

AUM:

$17,935.3M

$4,850.5M

Number of Units:

302.3M

46.9M

Daily Average Volume:

9,374,846

358,580

Inception Date:

1998/12/16

2006/06/19

XLK is by far the larger of the two funds as it is also the older and it is also more "general" providing diverse coverage of the technology sector as a whole. FDN is more specialized and thus smaller but the AUM is not an issue and there is a decent amount of liquidity available with nice sized daily average volumes. I do not see liquidity being an issue with FDN.

Finally I wanted to touch on the performance of the two funds. In my last article I did not cover this but this time I want to give you a quick sense on what each fund has returned. The chart below (sourced form Google Finance) shows the performance of the overall Nasdaq market (in yellow) compared to XLK (in red) and FDN (in blue):

As can be inferred, from the time FDN started until now it has outperformed the overall "technology" stock market (represented by the Nasdaq index) and also XLK as well.

Conclusion:

Having looked at the contents of the two funds I would conclude that the amount of overlap is very little and nothing to really be concerned with. If you are already a holder of XLK (as I am) an investment in FDN is not going to cause you to be over exposed to that many companies. If you are looking for a "FANGy" ETF that covers the famous FANG stocks and is more consumer focused then FDN is the better choice over XLK.

Owning both XLK and FDN would be a great way to pretty much cover all the main US technology companies that one would probably want to own. You will have excellent diversity in doing so. You could throw in some SNSR as I covered in my previous article for the good foreign technology exposure it offers as well as a focus on IoT and you will have a nice triumvirate of technology stocks with a core XLK holding to give the basics and a growth aspect via FDN and SNSR.

I look forward to discussing this with you more in the comments below. Thank you for reading.

Disclosure: I am/we are long XLK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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