First Trust China AlphaDEX Fund (FCA)

Published on by on August 18, 2011

FCA At A Glance
Issuer: First Trust
Structure: ETF
Expense Ratio: 0.80%*
Inception Date: 04/19/2011
Largest Holding Evergrande Real Estate**
Weight: 3.91%**
# Of Holdings 50**
AUM: $2.69M*
ADV 1,199*
2010 Gain (Loss): n/a
2009 Gain (Loss): n/a
2008 Gain (Loss): n/a
*As of 7/22/2011. **As of 7/6/2011

FCA is a rather unique China ETF, as it tracks an index that blurs the line between active management and passive indexing. While this ETF does technically track a benchmark as opposed to having an active manager, the index uses a quantitative methodology to select the best stocks for investment, giving it active management elements.

Under The Hood

The first thing to note is how young this product is, which debuted in mid-April of this year. For many investors its short track record may cause for concern, through First Trust’s other products in the AlphaDEX line have performed quite well.

When it comes to holdings, this fund may appear to be somewhat limited since it holds just 50 individual securities. What it lacks in depth, however, FCA makes up for in balance; no single firm gets more than a 4% weight, resulting in impressive diversification and balance in comparison to many other China ETFs. Overall, FCA dedicates 33% of its assets to its top holdings, leaving room for all holdings to have an effect on the portfolio rather than just one company.

FCA also does a nice job of maintaining sector balance, another area in which many China ETFs struggle. Though it currently has a heavy weight in financials, FCA gives at least moderate weightings to all corners of the Chinese economy, helping to create a more balanced profile.

Pros

FCA is a one-of-a kind China ETF, the only fund that utilizes an “enhanced” index designed to generate alpha within the Chinese market. Because FCA relies on a proprietary quant-based methodology to select component securities, it has the potential to generate excess returns relative to other China ETF options. Moreover, FCA provides an alternative to investors looking to steer clear of market cap weighted strategies that may have some rather serious drawbacks. While FCA is obviously a new product, it should be noted that the AlphaDEX methodology in general has a rather impressive track record.

There are some other advantages to the nuances of FCA’s index. Investors should also note that this ETF is one of the best balanced products in the China ETF space, as it provides exposure across all major sectors with giving too much weight too any one segment or particular holding.

Cons

One issue with this fund will be its age, as many institutions and investors are either hesitant to invest in new products or explicitly prohibited from funds without a lengthy track record.

Also note that this fund is on the upper end of expenses, charging 0.80% as an annual expense ratio. If FCA succeeds at generating excess returns over the long run, the additional basis points may be well worth it. But for those looking to keep expenses down, there are more cost efficient options out there that offer generally similar exposure; GXC, for example, maintains a similar profile at a lower price point.

Finally, the liquidity of FCA is worth noting. With about $3 million in AUM and an average daily volume of 1,200, this product will not be good for those looking to actively move positions. Instead, those looking to invest in this product would do well to use limit orders to battle the liquidity issues.

Final Verdict

Overall, many investors may find FCA gives them the full Chinese exposure that they need for their portfolio. The product has a great balance and diversity, but comes with high fees and low popularity. For those who buy into the AlphaDEX methodology, FCA is worth a closer look, but those put off by expenses may want to take a look at other broad-based funds like GXC.

<<<<<Previous: YAO Analyst Report…..FCA Analyst Report…..Next: FCHI Analyst Report>>>>>