Neither people nor process stand out at First Trust S-Network Fut Vhcl&Tech ETF, but it gets just enough right to help this strategy retain its Morningstar Medalist Rating of Bronze. The strategy charges fees in line with its similarly distributed peers, priced within the middle quintile.  

 The team managing this passive strategy earns the strategy an Average People Pillar rating. The strategy merits an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight volatility exposure and currently has an underweight in momentum exposure compared with category peers. High volatility exposure is attributed to companies with a higher standard deviation of returns. And low momentum exposure is rooted in holding stocks that are not currently on a winning streak and instead holding those that managers believe are undervalued. The strategy's parent firm has some investor-friendly attributes, like overall low fees, but it is held back by low portfolio manager retention. As a result, the firm gets an Average Parent Pillar rating.

Analyst Rating

Alphabet

Microsoft

Tesla

NVIDIA

Apple

Advanced Micro Devices

Intel

Texas Instruments

QUALCOMM

Analog Devices

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 S-Network Fut Vhcl&Tech ETF earns an Average Process Pillar rating. The main driver of the rating is that this fund tracks an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Impressive risk-adjusted performance also influences the rating. This can be seen in the fund's five-year alpha calculated relative to the category average, which suggests that the process was successful over that period. Lastly, the process is limited by the parent firm's five-year risk-adjusted success ratio of 31%. 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 investment strategy as stated in the fund's prospectus is:  The investment seeks investment results that correspond generally to the price and yield (before the fund’s fees and expenses) of an equity index called the S-Network Electric & Future Vehicle Ecosystem Index.  The fund will normally invest at least 90% of its net assets in the common stocks and depositary receipts that comprise the index. To be eligible for inclusion in the index and a company must be listed on a major recognized stock exchange and engaged in one of the following sectors: electric and autonomous vehicle manufacturing; enabling technologies or enabling materials. The fund is non-diversified. 

 The portfolio is overweight in technology and basic materials relative to the category average by 53.0 and 5.5 percentage points, respectively. The sectors with low exposure compared to category peers are consumer cyclical and consumer defensive, underweight the average by 55.4 and 4.3 percentage points of assets, respectively. The portfolio is positioned across 107 holdings and its assets are more dispersed than peers in the category. In particular, 40.7% of the fund’s assets are concentrated in the top 10 fund holdings, as opposed to the category’s 48.6% average. And in closing, in terms of portfolio turnover, this portfolio trades more frequently than the average peer in its category, which may result in higher trading costs for investors and cause a drag on performance.

Average

Process

First Trust’s team is good but unexceptional, earning the strategy an Average People Pillar rating. There’s a sizable bench of seven managers listed on the fund. Experience on the team is abundant, with 19 years of average portfolio management experience. Together, they manage a total of 105 strategies, with a Neutral asset-weighted average Morningstar Medalist Rating, indicating the team will struggle to deliver positive alpha relative to the category median in aggregate. This group has had relatively low management turnover, providing a stable environment and continuity for the strategies. 

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

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.

Parent

First Trust NASDAQ Global Auto Index Fund

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