First Trust Planning More AlphaDEX ETFs - Leveraged ETFs
January 16 2012 - 6:59AM
Zacks
First Trust, the Illinois-based ETF issuer best known for its
unique sector specific ETFs, recently announced plans for more
funds utilizing its proprietary AlphaDEX methodology. In the recent
filing with the SEC, the company revealed some of the initial
information regarding seven new funds, each targeting a specific
nation with the company’s unique weighting scheme. While details
regarding ticker symbols and top holdings were not released, we
have highlighted some of the key info from the preliminary filing
on these funds below:
Germany AlphaDEX Fund
For a new way to play the German market, First Trust looks to
one day give investors exposure to this fund which tracks the
Defined Germany Index. The product will have a cost of 80 basis
points a year and will only include companies that have float
adjusted market values of at least $100 million and annual dollar
value trading levels of at least $50 million. The main competition
looks to be from the ultra-popular iShares MSCI Germany Index Fund
(EWG). This product tracks the broad German economy and has an
expense ratio of 51 basis points as well as close to $2.3 billion
in AUM (read German Bond ETFs In Focus).
Canada AlphaDEX Fund
In the often overlooked Canadian market, investors may soon have
the chance to buy this proposed ETF which looks to follow the
Defined Canada Index. Much like its German counterpart, this fund
will cost investors 80 basis points a year and will cover companies
that have float adjusted market values of at least $100 million and
annual dollar value trading levels of at least $50 million.
Competition looks to once again come from iShares and the firm’s
MSCI Canada Index Fund (EWC). This product charges investors 52
basis points a year in fees and has quite the lead in AUM with
nearly $4.48 billion in total capital under management.
Australia AlphaDEX Fund
Thanks to the nation’s wide range of commodities, Australia has
become increasingly popular with investors recently. For those
looking to make a bet on the nation, First Trust’s proposed fund,
which tracks the Defined Australia Index, could eventually be an
interesting choice. The fund looks to charge investors 80 basis
points a year in fees and will employ the firm’s equal-dollar
weighting methodology in order to achieve exposure to the nation.
For competition, the MSCI Australia Index Fund (EWA) looks to be a
formidable foe as the fund charges investors 52 basis points in
fees and has close to $2.6 billion in assets under management (read
Top Three Currency ETFs).
United Kingdom AlphaDEX Fund
If an investor is looking to make a bet on Europe but is
uncertain of the future of the euro zone, the UK is often a top
choice for many. Current options are limited, but If First Trust is
able to negotiate its way past the regulatory issues, investors
will soon have another choice in the space with a fund that tracks
the Defined United Kingdom Index. This product also looks to charge
investors 80 basis points a year in fees, and like the rest on this
list, no ticker symbol or top holdings info was made available. For
investors seeking another way to play the market in the meantime,
the iShares MSCI United Kingdom Index Fund (EWU) is one of the only
ways to play the market right now. The fund has nearly $1.3 billion
in AUM and charges investors 0.52% a year in fees, suggesting that
if First Trust can get their AlphaDEX product out there it could
face some stiff competition.
Taiwan AlphaDEX Fund
For investors looking for a more emerging play, an ETF tracking
the Taiwanese market could be an interesting choice. This proposed
fund looks to follow the Defined Taiwan Index which gives exposure
to firms that have float adjusted market values of at least $100
million across the nation. Total fees once again come in at 80
basis points, making the fund competitive with other funds tracking
the nation. In fact, EWT, the main ETF from iShares tracking the
nation, charges investors 0.59% a year in fees for its services,
putting the proposed fund from First Trust close in terms of total
costs. However, it should be noted that EWT does have over $2
billion in AUM, so the company will have a long way to go on that
front (read Time To Get Regional With Bond ETFs).
Hong Kong AlphaDEX Fund
The city of Hong Kong continues to surge in importance as the
area becomes the key gateway to mainland China. For those seeking a
new way to play the market, the eventual launch of this AlphaDEX
fund could be welcomed news and could offer alpha over traditional
benchmarks. The fund does look to charge investors 80 basis points
a year in fees and have similar stipulations to the other funds on
this list in terms of minimum liquidity and size requirements for
investment. In terms of competition, iShares’ MSCI Hong Kong Index
Fund (EWH) looks to be the biggest challenger, as the fund has
close to $1.8 billion in AUM. Surprisingly, the fund charges just
52 basis points a year in fees, in line with other more
Western-focused products. This suggests that the proposed fund from
First Trust will have to generate some serious alpha to overcome
this expense hurdle.
Switzerland AlphaDEX Fund
Given the broad uncertainty in Europe, many investors have
pushed into ultra-safe markets such as the one in
Switzerland. For those looking for this safety, this proposed
fund could eventually be an intriguing alternative for investors.
The fund, like the rest of the products on the list, charges 80
basis points a year in fees and has stipulations regarding the
minimum size of securities that can be included in the benchmark.
Of the funds on the list, the Switzerland space may be the least
dominated by a particular fund. In fact, the MSCI Switzerland Index
Fund (EWL) from iShares has just under $500 million in assets, far
lower than many other products on the list. Nevertheless, the ETF
charges just 52 basis points a year in fees, providing a relatively
steep alpha-hurdle for First Trust (see Three Best Gold ETFs).
AlphaDEX Explained
Some investors may be wondering what ‘AlphaDEX’ really means or
how the process is conducted. Investors should note that the idea
is pretty simple as it looks to eliminate some of the lowest ranked
stocks from the benchmark while giving higher weightings to firms
that achieve top ratings. First, all the component stocks in a
benchmark are ranked separately on both growth and value factors.
Generally speaking, the top fifty ranked stocks in the benchmark
are then divided into quintiles and each equity is ranked equally
within each quintile with more assets going towards top rated
groups. This process is done and the stocks are rebalanced
semi-annually (ok maybe it isn’t that simple).
While the products can achieve alpha, investors should note some
of the downsides to the strategy. First, the funds generally have
far fewer holdings than their market cap weighted counterparts,
exposing them to greater individual security risk. Additionally,
the costs are often much higher for AlphaDEX funds although the
differential can be pretty low for some of the emerging markets of
the world. Nevertheless, for investors seeking a more ‘active’
approach to their ETF investing, any of these AlphaDEX funds could
make for an interesting choice (also see Inside The Cloud Computing
ETF).
Current AlphaDEX lineup
If approved, the funds would find a home among the company’s
already large lineup of AlphaDEX funds. Beyond ETFs that employ the
methodology as it relates to U.S. sectors, the company also has a
slew of funds targeting various regions and nations around the
globe. Among these, the company has several emerging market focused
AlphaDEX funds—such as those tracking Brazil (FBZ) and Latin
America (FLN)—as well as developed market funds—such as those
tracking the broad region (FDT) and Japan (FJP).
The new additions should greatly help the company round out its
line of AlphaDEX funds targeting developed markets and give
investors much needed choices in each of these countries. Whether
the funds can outperform more traditional products, however,
remains to be seen, as well as if investors will be willing to pony
up for these more expensive funds. The track record of the current
lineup of country specific funds in the AlphaDEX world is very
mixed with several outperforming but unable to attract inflows, so
it will be interesting to see if these other developed market funds
can break this trend and generate assets from a wide swath of the
investing public.
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