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The Frozen Yogurt of Net Sector Funds

"I know it's bad for me, but I gotta have it!" could apply to many things. For me, it describes a bowl of Starbucks Java Chip ice cream. For investors, it might be an investment product tied to an Internet index. But actually, the latter might not be so bad.

First Trust is getting in the sector ETF game with the First Trust Dow Jones Internet Index Fund (FDN), which started trading Friday, June 30.

The fund has 40 components: 25 services companies and 15 commerce companies.

There are rigid rules for inclusion worth noting. A company must generate 50% of its revenue from the Internet, have been public for at least three months and have a market cap of at least $100 million. The constituents can change over time. The specific objective of the index is to capture 80% of the market capitalization of the Internet sector. That makes it possible for there to be more or fewer stocks in the index and by extension, the fund.

Google (GOOG) is the largest holding in the fund at 11.2%, closely followed by Yahoo! (YHOO) at 10.75%. Usual suspects eBay (EBAY) and Amazon (AMZN) are also well represented at more than 8%.

A couple of not-so-usual suspects are online brokerages E*Trade (ET) and TD Ameritrade (AMTD) at 8.4% and 4.38%, respectively.

Some of the numbers for the fund's holdings include an average price-to-earnings ratio of 34, an average price-to-book ratio of 7.99, an average price-to-sales ratio of 6.55 and a median market cap of $1.2 billion.

A chart of the underlying index compared with various other benchmark indices shows that it doesn't really correlate very closely to any of them. From that we can extrapolate that the fund will not serve as a proxy for anything else.

As the chart below shows, the DJ Internet Index has been much more volatile than the tech sector at large, represented by the Amex Computer Technology Index (XCI).

More Volatile Than Tech
The DJ 'Net Index has often diverged from the larger sector
Click here for larger image.

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