MARKET COMMENT
October 19, 2006
There are so many new ETFs being
issued that it’s not surprising that some well-structured and much needed
issues get lost in the shuffle. If you’re
a fan of GOOG and the internet sector, you’re no doubt aware that HHH (Internet
Holders) structured as a trust can’t add any new names to its holdings. Therefore, GOOG, issued after its release, is
not a HHH constituent. But, First Trust’s
FDN ETF is based on the DJ Internet Index and as such has GOOG as a heavily
weighted component. (Listed below are
the top 10 holdings of FDN.)
Listed below are the constituents of HHH (Internet Holders)
courtesy of the AMEX.
You
can readily see the differences in weightings. FDN has a more
contemporary weigting and constituent base than HHH. You can get lucky
with HHH if EBAY has, as it did today, a good performing day. On the
other hand GOOG and EBAY combine to hold over 20% of FDN.
So what’s the problem?
No one knows about FDN as evidenced by the fact that the average daily
volume is less than 8K shares while HHH is over 250K shares. Why is this?
Because institutions may be playing HHH and GOOG together either by
shorting the former and being long the latter or perhaps being long both. Further, FDN’s lack
of volume may be the result of both too much ETF issuance and too little investor
interest in the stock market as evidenced by recent low flows to mutual funds and
lack of dynamic transaction volume from online brokers.
So, is FDN a diamond in the rough that’s been lost in the
avalanche of new ETF issues? If you
believe in proper internet index structure, yes!
Meanwhile, let’s inspect the usual suspects.
Can the rally in big caps extend to other neglected sectors?
Let’s examine an eclectic group of ETFs.
Yes,
the $INDU exceeded a close of 12K for the first time. The emphasis from
the financial media will be to promote this positive move to Main
Street where it’s expected Joe Sixpack will start throwing money at the
markets. Don’t bet on it since many would be investors are doing all
they can to pay those mortgages. In case you forgot, the US has a
negative savings rate. And, this just in from AMG Data Services:
Analyzing the above data suggests Joe Sixpack
isn’t beating a path to mutual funds—“yet”.
Sure there’s flow to ETFs, but most of that
might just be institutions using the ETFs to get
invested fast only to sell them later to buy individual shares. But, nevertheless, let’s give the market its
due, after all we’re involved.
What’s really interesting is that among the rubble or
tailings from the deluge of new ETF issues there are some gems. FDN may be one of those lost in the
rubble.
Disclaimer: The ETF
Digest maintains positions: FDN, HHH, GLD, FXE, IEF, IYR, XLU, PZJ, PZI, PHO
and IBB.