FDN: Why Internet Tech's Growth Potential Justifies Its Risks

The First Trust Dow Jones Internet Strategy Fund (FDN) has long been a bellwether for investors seeking exposure to the high-growth internet sector. Despite its recent volatility and underperformance relative to benchmarks, FDN’s portfolio of dominant tech players positions it to capitalize on transformative trends in e-commerce, cloud computing, and digital services. While risks such as high valuation and sector concentration are valid concerns, the long-term growth trajectory of internet-driven industries suggests these negatives are outweighed by FDN’s potential.

Ask Aime: Could FDN's portfolio of internet giants truly benefit from the growth of e-commerce and digital services?

The Growth Case for FDN

FDN tracks the Dow Jones Internet Composite Index, which includes 40 U.S. companies deriving at least 50% of revenue from internet activities. Its top holdings—Amazon (9.89%), Meta (9.50%), and Netflix (9.19%)—are leaders in e-commerce, social media, and streaming, sectors poised to benefit from secular trends like remote work, digital entertainment, and AI-driven services.

The internet economy’s growth is undeniable. By 2025, global digital ad spending is projected to exceed $700 billion, while cloud computing spending could hit $800 billion, according to recent estimates. FDN’s heavy exposure to Information Technology (35.84%) and Communication Services (29.90%) aligns with these trends.

Addressing the Negatives

Critics point to FDN’s risks:

1. Volatility: With a beta of 1.19 and standard deviation of 25.06%, FDN swings sharply with the market. However, its recent YTD decline of -4.91% (as of April 2025) reflects broader tech-sector corrections, not fundamental weakness. The ETF’s 1-year return of 21.56% still outperforms the S&P 500’s 18.41%, demonstrating resilience over cycles.

2. Valuation: A P/E ratio of 32.70 suggests high growth expectations. Yet, this aligns with peers in high-growth sectors like cloud computing and AI, where revenue growth often exceeds earnings.

3. Concentration Risk: The top 10 holdings account for nearly 60% of FDN’s assets. While this amplifies individual stock risks, it also reflects FDN’s focus on industry leaders with durable moats. Amazon’s AWS cloud dominance, Meta’s AI investments, and Netflix’s global content library exemplify this strength.

Technical and Analyst Backing

Technical indicators add momentum to the bullish case. FDN’s Golden Star Signal—triggered in September 2024—has historically preceded extended upswings. While overbought conditions (RSI14 of 76 as of May 2025) hint at short-term corrections, analysts argue the signal’s rarity justifies a long-term hold.

The Bottom Line: Growth Outweighs Risks

FDN’s expense ratio of 0.51% remains competitive for a sector-specific ETF, and its $6.29 billion in assets underscores investor confidence. While near-term volatility is inevitable—especially with U.S. tariff policy uncertainty—the internet sector’s structural growth should drive long-term gains.

Investors should consider:
- Entry Points: Use dips to $224 or below (key support levels) to buy on weakness.
- Diversification: Pair FDN with broader tech ETFs like XLK for balanced exposure.
- Time Horizon: Prioritize a multi-year outlook to smooth out short-term swings.

The data is clear: FDN’s top holdings are at the forefront of innovation, and the internet economy’s expansion will continue to overshadow its risks. For growth-oriented investors, this makes FDN a compelling buy despite its imperfections.

Conclusion
FDN’s recent underperformance and high volatility are challenges, but they are outweighed by its positioning in the high-growth internet sector. With top holdings like Amazon and Meta driving innovation, and structural tailwinds from digital transformation, FDN remains a key vehicle for capturing the next wave of tech-driven growth. While the ETF’s beta of 1.19 and concentration risks demand caution, the long-term upside—supported by a 14.40% since-inception return—justifies its place in aggressive portfolios. Investors who focus on FDN’s underlying fundamentals and technical signals, rather than short-term noise, are likely to be rewarded.