Investment Strategies Comparison: FDN vs. QQQ

• In the past year, FDN has returned 8%, while QQQ saw an 18% return. Over a five-year stretch, QQQ’s increase was a whopping 97% compared to FDN’s more modest 27%.

• It’s worth noting that FDN doesn’t include major players like Nvidia, Apple, Microsoft, or Tesla—companies that have significantly contributed to QQQ’s strong performance recently.

• FDN has an annual expense ratio of 0.49%, which is higher than QQQ’s 0.18%. The process of equal-weight rebalancing can lead to higher turnover and tax inefficiency.

Concentration risk is something investors often worry about, especially when large tech companies dominate returns. The First Trust Dow Jones Internet Index Fund (FDN) offers a different approach with its equal-weighted strategy, focusing on Internet stocks. However, there are trade-offs to consider.

FDN tracks the Dow Jones Internet Composite Index, distributing investments across roughly 42 Internet-focused companies. Its largest stake is in Meta Platforms, accounting for just over 10% of its assets, while Nvidia makes up 9%. This fund includes companies like DoorDash, Snowflake, Cloudflare, and Carvana which might not feature in QQQ.

Essentially, FDN is banking on broad growth in Internet businesses, aiming to prevent any single company from skewing the results. By maintaining equal weight, it sells off top performers and invests more in those lagging behind. This can help cushion the blow if any particular company falters while benefiting from the Internet sector’s upsides.

Looking at performance, over the last year, FDN’s 8% gain might seem modest compared to QQQ’s 18%. The gap is even larger over five years: 97% for QQQ versus a mere 27% for FDN. A significant factor here is that FDN lacks exposure to Nvidia, Apple, and Microsoft, which combined, take up a quarter of QQQ. These stocks have powered the Nasdaq’s robust performance, particularly Nvidia with its AI-focused gains. FDN’s equal weight strategy means it misses out on these tech giants.

There are a couple of other considerations. First, the higher expense ratio of 0.49% for FDN is nearly three times that of QQQ. Over time, this difference can become noticeably impactful. Second, the equal weighting leads to increased turnover, which can create tax issues for taxable accounts as it involves selling gainers and buying underperformers more frequently.

Moreover, FDN is banking on the idea that Internet companies will continue to thrive, even while missing out on semiconductor and hardware stocks crucial for technology advancements. If AI infrastructure remains a primary profit driver, FDN’s focus on Internet-only stocks could pose a considerable risk.

Long-term, those who prioritize exposure to technology might find QQQ or broader market funds more beneficial since the five-year performance differences translate into potential wealth loss. For those eyeing investments in the so-called Magnificent Seven stocks, FDN’s absence of Nvidia, Apple, Microsoft, and Tesla means it’s lacking four pivotal growth players.

If equal weighting appeals to you for technology investments, consider Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE). It offers an equal-weight approach across the Nasdaq 100 stocks, covering the same companies as QQQ with less concentration risk. Plus, its expense ratio is lower at around 0.35%, letting you tap into semiconductor, hardware, and software companies that FDN skips.

Ultimately, FDN serves a specific niche, catering mainly to those desiring focused Internet exposure and who are okay with significant underperformance. However, for most investors, QQQ or QQQE will likely align better with their goals.

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