First Trust Planning Active ETFs

by on February 5, 2010

First Trust, best known for its line of AlphaDEX ETFs that utilize quantitative analysis to select holdings poised for outperformance, is planning a pair of full-blown active ETFs. The proposed funds are the First Trust Developed International Markets AlphaDEX Fund and the First Trust Emerging Markets AlphaDEX Fund. The SEC filing notes that the funds will be actively-managed, and not seek to track the performance of a specified index.

The developed markets fund will seek to identify companies domiciled in non-U.S. developed markets considered to be large cap or mid cap stocks. Potential countries include Japan, Hong Kong, Western Europe, Canada, New Zealand and Australia. The process for selecting the component companies is similar to the process underlying the StrataQuant indexes on which AlphaDEX funds are based. First Trust will select 300 securities with the highest rankings according to its proprietary model, and then separate the components into quintiles based on model rating, with the higher scoring quintiles receiving more weight. But the prospectus does provide for manager discretion in the security selection process, noting that “First Trust reserves the right to overweight, underweight or exclude certain companies from the Fund.”

The methodology behind the emerging markets ETF will be similar: First Trust will select 150 securities with the highest rankings from its proprietary model and apply a similar quintile-based allocation system. According to the filing, the management of the funds will be the responsibility of a committee at First Trust that includes chief investment officer Bob Carey and chairman of the Investment Committee Daniel Lundquist.

First Trust’s product line consists of about 40 ETFs covering both domestic and international equity markets. The company’s largest ETF is the ISE Revere Natural Gas Fund (FCG), which has become popular as a way to gain exposure to natural gas without the complexities of a futures-based strategy (see Three Alternative To UNG for a look at more ways to gain natural gas exposure).

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Disclosure: No positions at time of writing.