In Hollywood, plenty of sequels are made. Whether or not those movies attain the success of “The Godfather: Part II” is in the hands of moviegoers. The world of exchange traded funds (ETFs) is loaded with sequels, too. Here, issuers identify an existing, successful ETF and look for new ways to spin it.
Those new spins can include using the same methodology behind a successful large-cap ETF for a comparable small-cap fund or adding an international counterpart to an existing domestic fund. Sometimes, that strategy works.
In terms of sheer performance, the First Trust Dow Jones International Internet ETF (FDNI) is an ETF sequel that is working. FDNI, which debuted last November, is the international cousin of the wildly popular First Trust Dow Jones Internet Index Fund (FDN), the largest US-listed Internet ETF and one of the largest industry ETFs of any stripe.
FDNI is trailing its older domestic counterpart by about 200 basis points this year, but the international Internet ETF is up 19.24 percent year-to-date and was one of just a dozen ETFs to hit all-time highs on Friday, May 17.
FDNI targets the Dow Jones International Internet Index and holds 41 stocks. The fund's underlying index takes 40 stocks from the S&P Global Ex-US Broad Market Index and looks to split those names among e-commerce companies and Internet services firms. Thanks to the likes of Amazon.com Inc. (AMZN), U.S. investors are increasingly familiar with the potency of the e-commerce theme , but that theme extends well beyond U.S. borders.
“Online retail sales in China exceeded ¥9trn in 2018, topping the world for the sixth consecutive year, spokesperson Gao Feng said during a regular conference of the Ministry of Commerce (MoC) on 21 March,” reports The Telegraph . “The country’s online retail sales maintained high-speed growth over the past 10-plus years, said Gao, who is also deputy director-general of the General Office of the MoC.”
Not surprisingly, China is by far the largest country weight in FDNI at 48.67% (as of May 16 ). China is the world's largest Internet market and home to a booming e-commerce market. Six of FDNI's top 10 holdings are Chinese stocks, including Baidu, Inc. (BIDU), JD.com (JD) and Ctrip.com International Ltd. (CTRP).
Data confirm that Asia, led by China, is pushing the global e-commerce market to new heights.
“A growing middle class and the huge demand for foreign goods is contributing to the health of China’s e-commerce performance,” reports Digital Commerce 360 . “Additionally, according to Bain & Company’s annual luxury study , Asia is the “growth engine” for online luxury sales. The category jumped an impressive 23.3% in 2017 and was expected to grow 21.4% last year, and consumers in mainland China are leading the way. But overall online shopping in rural areas of the country also grew 39.0% in 2017, and cross-border commerce flourished, according to the Ministry of Commerce.”
In addition to its hefty China exposure, FDNI devotes a combined 19 percent of its weight to South Korea, Japana and Australia, meaning more than two-thirds of the fund's geographic exposure is levered to Asia's burgeoning e-commerce markets.
A Discount...Sort Of
Big-name domestic Internet stocks are often richly valued, but the likes of Amazon and Facebook, Inc. (FB) have justified lofty valuations by meeting and exceeding investors growth expectations. As such, the domestically-focused FDN's components trade at more than 37x earnings and 5.1x sales. Those numbers on the international FDNI are 30.15x earnings and 3.42x sales.