First Trust Advisors - Best North American Equity ETF Management Firm

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US-headquartered First Trust Advisors LP (FTA) manages or oversees USD104 billion in assets (as of 31 December, 2015), raised on the back of innovative smart beta ETF creation. Eric Anderson (pictured), Senior Vice President at First Trust Advisors, explains that he is charged with bringing that ETF tool kit to Europe. The firm opened an office here in 2012, First Trust Global Portfolios Limited (FTGP), and launched its first three ETFs in Europe in 2013, listed on the London Stock Exchange and structured as Irish UCITS. The London office is led by FTGP CEO, Derek Fulton.

Most of FTA's ETFs are based on their AlphaDEX methodology which underpins its range of smart beta ETFs. Put simply, AlphaDEX seeks to select and weight stocks on merit not size. It brings a fundamental investment edge to the equity ETF world.

Anderson says: "Our model is 100 per cent rules based, with a transparent methodology. When you hear the name ETFs, people tend to think of passive tracker funds, but the merit of our approach is that we de-emphasise size as a factor in equity investment and instead focus on fundamental investment merit."

The AlphaDEX methodology analyses growth and value companies separately. The growth side of the model is focused on factors that combine momentum, sales growth and price to sales. On the value side, the model looks at price to book, price to cashflow, and return on assets as a check factor. "We are looking for inexpensive and valuable stocks, but at the same time, highly profitable," Anderson explains.

Often the companies that fall into the growth side of the AlphaDEX model are younger companies that are not yet profitable because they are investing in their future growth, but they have high momentum. The AlphaDEX methodology checks that momentum, or stock price movement, over three, six and 12 months. The resulting high scoring growth companies have high momentum and sales growth, while also trading at an attractive price to sales ratio; so, growth, but at a reasonable price.

The indexes and ETFs are rebalanced quarterly for US strategies and semi-annually for the non-US strategies. Currently AlphaDEX ETFs that are available in Europe provide exposure to the US, the UK, emerging markets, global and the Eurozone.

The First Trust United Kingdom AlphaDEX UCITS ETF outperformed the FTSE 100 by 12 per cent last year. "None of the most popular indices were designed to be investment vehicles," Anderson says. "So we create indexes designed for investment purposes that could bring a more diversified portfolio."

The top ten holdings in the S&P 500 represent 20 per cent of the weight of the S&P 500, Anderson explains – most of the indexes' performance comes from just 2 per cent of the holdings. 

By contrast, the top ten holdings of the First Trust US Large Cap Core AlphaDEX UCITS ETF represents 4.4 per cent after the rebalance, by rule. "Because of that methodology, we are one of the fastest growing issuers of ETFs," he says. "Since March 2009, our ETF assets have grown 94 per cent. AlphaDEX represents the best of active management within ETFs. We like the structure, but recognise the benefits active management, however we prefer to implement these factors in an unemotional and disciplined manner."

Anderson goes on to say that "As a result of the regular rebalancing AlphaDEX ETFs typically experience much higher turnover than their passive benchmarks". 

Anderson says: "The aim of the AlphaDEX index methodology is to provide better long-term, risk-adjusted returns than those traditional market-capitalisation weighted indices through merit based stock selection." 
 


Indexes are unmanaged and an investor cannot invest directly in an index. All opinions constitute judgements as of the date of release and are subject to change without notice. There can be no assurance that any forecasts will be achieved. Data is taken from sources we believe to be accurate and reliable but we do not guarantee its accuracy or completeness. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. It is not an invitation to make an investment in an ETF nor does the information, recommendations or opinions expressed herein constitute an offer for sale of a fund. Potential investors should conduct their own investigation and analysis and consult its/their own professional tax, accounting, financial or other advisors as to the risks involved in making an investment.

 

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