Weakness in First Trust Active Gbl Qual Inc ETF's Process and People Pillar ratings limits this strategy to a Morningstar Medalist Rating of Negative. The portfolio maintains a sizable cost advantage over competitors, priced within the second-lowest fee quintile among peers.  

 The strategy receives a Low Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant underweight position in liquidity exposure and an overweight in momentum exposure compared with category peers. Low liquidity risk exposure is attributed to stocks with a low trading volume, limiting managers' flexibility. And momentum exposure is rooted in holding stocks currently on a winning streak. The strategy’s management team earns a Below Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Microsoft

TotalEnergies SE

Merck

nVent Electric plc

Banco Santander

Coca-Cola

Mondelez

Credit Suisse

Suncor Energy

Medtronic

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. First Trust Active Gbl Qual Inc ETF earns a Low Process Pillar rating. 

The main driver of the rating is the parent firm's five-year risk-adjusted success ratio of 29%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. The parent's relatively low success ratio suggests that the firm could do better across its fund lineup. The parent firm's inferior risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 2.7 stars, also weakens the process. A lower star rating suggests that the firm has struggled to outperform on a risk-adjusted basis. Management team experience, which averages seven years at this fund, detracts from the rating as well.

 This strategy skews toward larger, more growth-oriented companies than its average peer in the Global Large-Stock Value Morningstar Category. Analyzing additional factors, this strategy continually held some stocks with low trading volume over the last few years. Less-liquid stocks might offer strong returns to compensate for their risks, but they can be harder and more expensive to trade in bear markets. In the latest month, the strategy was also less exposed to the Liquidity factor compared with Morningstar Category peers. This strategy has also demonstrated more exposure to high-momentum stocks over peers in recent years. Momentum is based on the premise that stocks that have recently outperformed will continue to outperform, and those that have underperformed will stay behind. Compared with category peers, the strategy also had more exposure to the Momentum factor in the most recent month. Additionally, the strategy has constantly maintained a defensive tilt, with exposure to high-quality stocks. Such holdings could cause it to trail peers during economic booms, but help it better withstand busts. In this month, the strategy also had more exposure to the Quality factor over its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in technology and industrials relative to the category average by 14.5 and 5.5 percentage points, respectively. The sectors with low exposure compared to category peers are real estate and consumer cyclical, underweight the average by 6.3 and 5.8 percentage points of assets, respectively. The strategy owns 38 securities and is relatively concentrated. In particular, 45.2% of the fund’s assets are housed within the top 10 holdings, compared with the category’s 14.2% average. And in closing, in terms of portfolio turnover, looking at year-over-year movements, 77% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Process

First Trust Active Gbl Qual Inc ETF earns a Below Average People Pillar rating. The team is backed by Ben Lofthouse, the longest-tenured manager on the strategy, who brings 16 years of listed portfolio management experience. The average Morningstar Rating of the strategies they manage is 3.4 stars, demonstrating above-average risk-adjusted performance versus category peers. The team is small but adequately equipped, with two other supporting listed managers. Together, the three boast seven years of average listed portfolio management experience.  None of the managers here invest any money in the strategy, which is disappointing, as such investments help align managers' interests with fundholders.

 Note: The People Pillar rating is indirectly assigned by an analyst. The longest-tenured manager of the fund also manages a different product rated by an analyst. Their analyst-assigned People Pillar rating is combined here with the People scores (algorithmic or analyst-assigned) for the fund’s other managers on a tenure-weighted basis.

Below Average

People

First Trust meets the industry standard for stewardship, but it could do more to align itself with investors. It earns an Average Parent rating.

This is a team-oriented organization that eschews star managers. While exchange-traded funds represent the bulk of the firm's assets, First Trust bypasses the competitive market for low-cost beta funds, instead opting for complex strategies with higher management fees. However, the firm's focus on ETFs for future product development underpins its commitment to tax efficiency and transparency. Some of its thematic strategies appear trendy, but it stands behind them and rarely liquidates funds. 

The firm is a private partnership, controlled by Jim Bowen, the CEO. Many senior managers are limited partners. This ownership structure helps the firm stay focused on the long term and promotes retention, which has been strong for the investment team. The firm has grown considerably over the past decade and is among the largest providers of actively managed ETFs, as well as unit investment trusts. As it has grown, the firm has expanded its investment team and beefed up its technology infrastructure.

First Trust's focus is on educating advisors and providing them solutions. This may benefit investors indirectly, but First Trust could do more to directly align with investors by cutting fees and limiting trendy strategies.

Average

Parent

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