First Trust Rolls Out International AlphaDEX ETFs

by on April 20, 2011 | ETFs Mentioned:

First Trust announced the launch of 13 new ETFs this week, building out the company’s suite of AlphaDEX products that offer exposure to equity benchmarks constructed using quantitative analysis designed to identify stocks that will outperform broad cap-weighted indexes. Joining an existing suite of domestic equity ETFs are nine international equity AlphaDEX products:

  • Asia Pacific Ex-Japan AlphaDEX Fund (FPA)
  • Europe AlphaDEX Fund (FEP)
  • Latin America AlphaDEX Fund (FLN)
  • Brazil AlphaDEX Fund (FBZ)
  • China AlphaDEX Fund (FCA)
  • Japan AlphaDEX Fund (FJP)
  • South Korea AlphaDEX Fund (FKO)
  • Developed Markets Ex-US AlphaDEX Fund (FDT)
  • Emerging Markets AlphaDEX Fund (FEM)

“The nine funds comprising the AlphaDEX International family of funds consists of a diverse range of broad, regional and single country funds,” said Dan Waldron, Senior Vice President, Exchange-Traded Funds Strategist of First Trust. “We believe the positive effects of globalization are going to continue for years to come and investors may benefit from a globally diversified investment portfolio, particularly in the emerging markets where GDP growth for 2011 is projected to be 6.4% compared to 2.2% for advanced economies, according to the International Monetary Fund.”

First Trust also added four additional U.S. equity AlphaDEX ETFs, filling out s suite of products that already included large cap options and core small cap and mid cap funds. The new additions include:

  • Mid Cap Growth AlphaDEX Fund (FNY)
  • Mid Cap Value AlphaDEX Fund (FNK)
  • Small Cap Growth AlphaDEX Fund (FYC)
  • Small Cap Value AlphaDEX Fund (FYT)

First Trust debuted its Small Cap Core AlphaDEX Fund (FYX) in May 2007. Through the first quarter, the index underlying that ETF had beaten the S&P SmallCap 600 Index by about 230 basis points annually over the previous three years. The First Trust Mid Cap Core AlphaDEX (FNX) has an even more impressive track record. Through the first quarter of 2011, the underlying index had a three-year annualized return of about 13.8%, significantly higher than the 10% annual gain turned in by the S&P MidCap 400 Index.

Under The Hood

The AlphaDEX methodology is relatively straightforward in its implementation. Beginning with a broad-based cap-weighted index, such as the S&P 500, the index provider ranks component stocks based on growth metrics such as 12-month price appreciation and sales-to-price ratio and also on value metrics such as book value-to-price, cash flow-to-price, and return on assets. Based on style designations, scores are computed for each component company, and the worst performers are dropped from the index. Those that make the cut are divided into tiers based on rankings, with the highest-rated stocks receiving the largest allocations.

First Trust has been offering several of the AlphaDex products for more than three years, and the entire suite has established an impressive track record. At the end of the first quarter, the Large Cap Core AlphaDEX Fund (FEX) had an annualized return over the last three years of about 6.5%. During that same period the S&P 500 Index, which represents the universe form which component stocks are taken, gained just 2.35% annually. Many of the existing AlphaDEX products, which segment the U.S. market by size/style or sector, have similarly outperformed the broad-based benchmarks from which they draw their holdings.

The AlphaDEX products blur the line between active management and passive indexing. Each of the ETFs seeks to replicate an index, and there is generally no discretion afforded to managers to decide which stocks should be included and which should be avoided. But the methodology behind the underlying benchmark includes use of quantitative strategies and stock screening processes to determine holdings in an attempt to generate alpha relative to traditional market capitalization-weighted indexes. In return for the opportunity to generate alpha, investors pay higher expense ratios to utilize the AlphaDEX products; fees can be as much as 65 basis points higher than plain vanilla indexed funds. Almost all of the AlphaDEX products have more than justified that hefty price tag with their performance relative to indexes available through low cost ETFs, and asset inflows have accelerated.

Impressive Growth

Thanks in large part to the impressive performance from the AlphaDEX suite of ETFs, First Trust has become one of the fastest-growing ETF issuers. The company’s AUM stood at about $7.3 billion at the end of March, an increase of more than 150% from the same period a year earlier. Total ETF industry assets grew by about 31% during that same period; First Trust’s growth rate over that stretch was the largest of any of the top 12 ETF issuers by total assets, far outpacing even the significant expansion at Vanguard, WisdomTree, and Van Eck.

Disclosure: No positions at time of writing.