Weakness in First Trust EIP Carbon Impact ETF's People and Process Pillar ratings limits this strategy to a Morningstar Medalist Rating of Neutral. The strategy charges fees in line with its similarly distributed peers, priced within the middle quintile.  

 The management team doesn't personally invest much alongside shareholders. This is a large contributor to the strategy's Below Average People Pillar. The strategy earns a Below Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight quality exposure and has a considerable overweight in volatility exposure compared with category peers. High quality exposure is attributed to stocks with low financial leverage and strong returns on equity. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy's parent organization earns the firm an Average Parent Pillar rating, and this rating is inherited from vehicles belonging to the same branding entity and is indirectly assigned by an analyst.

Analyst Rating

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Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. First Trust EIP Carbon Impact ETF earns a Below Average Process Pillar rating. 

The process benefits from low expenses across its parent firm's funds, whose fees rank in their respective category's second-cheapest quintile on average. The pattern of low expenses at the firm indicates that it is focused on delivering strong results for investors. However, the rating is weakened by 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 beat 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 disappointing risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 2.7 stars, also holds the process back. A lower star rating suggests that the firm has struggled to outperform on a risk-adjusted basis.

 This strategy skews toward smaller, more growth-oriented companies compared with its average peer in the Utilities Morningstar Category. Analyzing additional factors, this strategy has consistently favored high-quality stocks, including those with low financial leverage and solid returns on equity, compared with Morningstar Category peers during recent years. High exposure to the quality factor means holding companies that are consistently profitable, growing, and have solid balance sheets. In recent months, the strategy was more exposed to the Quality factor compared with its Morningstar Category peers as well. This strategy has also exhibited a tilt toward high-volatility stocks over these years, meaning it has invested in companies that have a higher historical standard deviation of returns. Such exposure tends to pay off when markets are hot and to be costly when they are not. Compared with category peers, the strategy also had more exposure to the Volatility factor in the most recent month. Additionally, this strategy has tilted toward illiquid stocks during these years, evidenced by holding companies with relatively lower trading volumes than peers. 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 recent months, the strategy also had less Liquidity factor exposure than 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 energy by 18.9 percentage points in terms of assets compared with the category average, and its industrials allocation is similar to the category. The sectors with low exposure compared to category peers are utilities and communication services, underweight the average by 14.2 and 3.4 percentage points of assets, respectively. The portfolio is positioned across 54 holdings and is diversified among those holdings. In its most recent portfolio, 40.5% of the portfolio's assets were concentrated in the top 10 fund holdings, as opposed to the category’s 69.5% average. And in closing, in terms of portfolio turnover, on a year-over-year basis, 47% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Below Average

Process

First Trust EIP Carbon Impact ETF earns a Below Average People Pillar rating. The team benefits from the stability of the management team. Specifically, the fund has not seen a manager change in the last five years. However, the rating is weakened by the parent firm's five-year success ratio of 39%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median return for the period. The parent's relatively low success ratio suggests that the firm could do better across its fund lineup. The combined average five-year excess return of each manager also detracts from the team. It shows that the funds they manage have trailed their respective category's average return.


James J. Murchie, the longest-tenured manager on the strategy, provides strong guidance, bringing forward 18 years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 3.8 stars, demonstrating encouraging risk-adjusted performance. Although the team is small, it is a solid supporting cast. Together, the three listed managers boast more than an average of 15 years of 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.

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

First Trust EIP Carbon Impact ETF

ECLN is an actively-managed fund comprised of developed-economy equities of companies committed to a reduction of carbon emissions.

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News for First Trust EIP Carbon Impact ETF ETF (ECLN)