FDN: Netflix Earnings May Dictate The Next Move

The First Trust Dow Jones Internet Index Fund (FDN), a $7.3 billion ETF with significant exposure to mega-cap internet companies like Amazon, Meta, and Netflix, has been assigned a 'hold' rating. This cautious stance is primarily due to the fund's stretched valuation, trading at 30 times earnings with a high PEG ratio, and its shares encountering key technical resistance in the $267-$270 range. Despite strong past share-price momentum and healthy liquidity, the current valuation and technical hurdles suggest a potential pause as Q2 earnings season unfolds.

Analysis

The First Trust Dow Jones Internet Index Fund (FDN) presents a mixed outlook, characterized by a conflict between strong momentum and a stretched valuation. The ETF, with $7.3 billion in AUM, trades at a lofty 30 times estimated earnings, supported by a long-term EPS growth forecast of just 9%, resulting in a high PEG ratio exceeding 3.0x. This valuation concern is amplified as the fund approaches a critical technical resistance zone between $267-$270. Performance is heavily concentrated, with over 30% of the portfolio in Amazon, Meta Platforms, and Netflix, making upcoming Q2 earnings reports, beginning with Netflix this week, a pivotal catalyst. While the fund's long-term moving average is rising and its RSI momentum indicator remains in a bullish range, suggesting underlying strength, its 'pause' at the current resistance level warrants caution. Support is identified near the $240 level, which aligns with its 200-day moving average and a previous price gap.

Key Decisions for Investors

• Investors should monitor FDN's ability to break the $267-$270 resistance level, as a failure to do so could trigger a retracement towards the $240 support level, especially given the high valuation.
• Given the fund's 30% concentration in AMZN, META, and NFLX, positions should be evaluated in the context of upcoming Q2 earnings, as any surprises in guidance will disproportionately impact the ETF's performance.
• For those considering a new position, a prudent strategy may be to await either a confirmed breakout above resistance for a momentum play or a pullback to the $240 support zone for a more favorable entry point on valuation.