Already Hot, This Internet ETF Often Soars in Q4

Already scorching hot this year, the FANG stocks – the widely followed quartet comprised of Facebook, Inc. (FB),, Inc. (AMZN), Netflix, Inc. (NFLX) and Google parent Alphabet Inc. (GOOG) – could rally even more if previous fourth-quarter trends hold true to form. Of course, investors can tap the FANG stocks with various exchange-traded funds (ETFs), including the First Trust Dow Jones Internet Index Fund (FDN).

Actually, it is FDN that has a penchant for bullish fourth quarter performances. The fund has been one of the best performing U.S. ETFs during the last three months of the year since it debuted in mid 2006. The $4.78 billion FDN, which is the largest internet ETF trading in the U.S., posts an average fourth quarter gain of 4.4% and a median increase of 4.8%, generating gains in the quarter 60% of the time on average. (See also: The One ETF to Own the Top Internet Company Stocks.)

FDN tracks the Dow Jones Internet Composite Index and allocates over 30% of its combined weight to the FANG quartet. Nearly 70% of FDN's holdings are classified as technology stocks, with 19.2% being classified as consumer discretionary names. Amazon and Netflix account for the bulk of the ETF's consumer cyclical exposure.

Best Showing in Four Years

FDN is up about 29% year to date, or more than twice the performance of the S&P 500. Assuming the ETF posts its average fourth-quarter gain of 4.3% and finishes 2017 with a gain of just over 33%, that would be FDN's best annual showing since 2013, when it surged 53.6%. Barring a disaster of epic proportions, FDN is poised to extend its annual winning streak to six years.

Still, internet stocks remain pricey. FDN's price-to-earnings ratio is just over 31, well above the comparable metric on the S&P 500 and the Nasdaq 100, the home index for many of FDN's holdings.

Most if not all of FDN's 42 components can be considered growth or momentum stocks, indicating why the ETF historically performs well in the fourth quarter. November marks the start of the best six-month period in which to own stocks, and that time frame often favors higher-beta, cyclical sectors. Usually, the technology sector excels in October and during much of the stronger six-month frame.

Investors have been enthusiastic about FDN this year, having pushed $275 million into the fund year to date. However, there was modest profit taking in the ETF during the recently completed third quarter, when investors pulled almost $25 million from the fund. (See also: It Should Be FAAANG, Not FANG: BofAML.)

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