Internet ETF is a long-term play

This fund is headlined by stable industry leaders such as Google, Amazon and Yahoo.

By TheStreet Staff Dec 14, 2010 12:50PM

Online © Medioimages/Photodisc/Getty ImagesBy Don Dion, TheStreet

 

The breakneck expansion of the ETF universe has introduced investors to a diverse collection of products that track new and increasingly narrow corners of the global marketplace.

 

While some of these funds have struggled to gain a following before fizzling away, others have grown in prominence, earning a respectable following and establishing a sturdy foothold in the industry.

 

The First Trust Dow Jones Internet Index Fund (FDN) exemplifies a narrowly focused ETF that has risen to prominence.

 

With its well-diversified portfolio and the increasing importance of the Internet in our daily lives, the fund has grown from being a small, short-term niche position to a long-term fixture that can be found within a number of my ETF portfolios.

When I initially took on exposure to FDN, my goal was to use the fund as a short-term way to capture the increasing popularity of online retail during the 2009 holiday season. FDN is ideally suited to play online retail, with a large percentage of its portfolio in companies like Amazon.com (AMZN) and eBay (EBAY). Together, these two companies account for close to 15% of its total portfolio.

 

Thanks to companies such as AMZN and EBAY, consumers no longer have to battle crowds and wait in long lines at the mall to get their holiday shopping finished. Rather, armed with just a laptop or smart phone, consumers can deal with their holiday retail fix in the office or from the comfort of their own homes.

 

In recent years the appeal of online retail has caught on in a big way. In 2010, sales on Cyber Monday managed to surpass those on Black Friday for the first time, totaling $1 billion, a 16% increase from the previous year.

 

As I initially theorized, the fund performed well during those holiday months. However, throughout 2010, FDN has continued to earn its keep as a way to play our growing interest in technology and our need to stay connected with the world around us.

 

In 2010, the fund has performed well, with a 40% lift year to date, handily beating out other tech-heavy funds such as the PowerShares QQQ (QQQ), which, year to date, has gained only 20%.

 

Part of FDN's long-term strength lies in its diversification. The fund's index is headlined by industry leaders such as Google (GOOG), AMZN and Yahoo! (YHOO), which will help provide the fund with stability.

 

However, FDN also boasts exposure to popular momentum players such as Netflix (NFLX) and Salesforce (CRM), which has given the fund some welcomed pop.

 

In order to work effectively and stay constantly connected to our fast-paced interconnected world, we are becoming increasingly reliant on our computers, smart phones and other gadgets.

 

According to the results of a new survey from Forrester, U.S. consumers are spending as much time online as they are watching television. This all bodes well for FDN's long-term future. To meet our technological demands of our everyday lives, the products and services provided by companies such as Google, Yahoo and Amazon will become only more essential.

As we move ahead, I expect to see FDN continue to grow in popularity. Once again, this fund should gain strength in the short term as consumers continue to look online for holiday deals. However, risk-tolerant investors looking for a well-diversified way to track our growing need for technology in our lives may want to consider adding FDN to their portfolios for the long term.

 

Don Dion, president of Dion Money Management, is a contributor for TheStreet.

 

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