The combination of a middling Process Pillar rating and a Below Average People Pillar rating limit  First Trust North Amer Engy InfrasETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The strategy has an experienced management team, but other weaknesses drive the strategy's Below Average People Pillar. The strategy gets an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a substantial underweight position in yield exposure and volatility exposure compared with category peers. Low yield exposure is attributed to holding fewer stocks with high dividend or buyback yields -- instead, typically holding companies with a stronger focus on growth opposed to returning capital. And low volatility exposure is rooted in stocks that have a lower 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 North Amer Engy InfrasFund earns an Average Process Pillar rating. 

The largest contributor to the rating is the fund's strong long-term risk-adjusted performance. This can be seen in its ten-year alpha calculated relative to the category average, which suggests that the managers have shown skill in their allocation of risk. The stability of the management team also bolsters the rating. Specifically, the fund has not seen a manager change in the last six years. Lastly, the process is limited 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 modest success ratio suggests that the firm could do better across its fund lineup.

 This strategy leans toward larger, higher-growth companies compared with its average peer in the Energy Limited Partnership Morningstar Category. Analyzing additional factors, this strategy has constantly downplayed yield, with its portfolio holding fewer companies with high dividend or buyback yields compared with Morningstar Category peers in recent years. This is demonstrated by the portfolio's low exposure to dividends or buybacks. While companies with high yields provide steady income payments, they may cut payouts if their earnings fall. In the latest month, the strategy was also less exposed to the Yield factor compared with Morningstar Category peers. The managers have also shown an underweight risk tilt, demonstrated by lower volatility exposure over peers in recent years. These low-risk stocks are typically at their best when markets are not. Low volatility exposure contributes to limited loss on the downside at the cost of a lag in bull markets. Similarly, in recent months, the strategy also had less exposure to the Volatility factor than peers. 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. Nevertheless, the fund's Liquidity exposure was in line with peers in the latest month. 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 utilities and industrials relative to the category average by 33.0 and 4.0 percentage points, respectively. The sectors with low exposure compared to category peers are energy and consumer cyclical, with energy underweighting the average portfolio by 36.8 percentage points of assets and consumer cyclical similar to the average. The portfolio is positioned across 64 holdings and is less top-heavy than peers. Specifically, 49.2% of the portfolio's assets are concentrated within the top 10 fund holdings, compared to the category’s 60.6% average. And finally, in terms of portfolio turnover, on a year-over-year basis, 32% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Average

Process

First Trust North Amer Engy InfrasFund earns a Below Average People Pillar rating. The team is supported by the stability of the management team. Specifically, the fund has not seen a manager change in the last six years. However, the rating is limited by the parent firm's five-year success ratio of 39%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median return for the period. The parent's subpar success ratio suggests that the firm could do better across its fund lineup. The combined average five-year excess return of each manager also holds the rating back. It shows that the funds they manage have trailed their respective category's average return.


The team is backed by James J. Murchie, the longest-tenured manager on the strategy, who brings 18 years of listed portfolio management experience. The average Morningstar Rating of the strategies they manage is 3.5 stars, demonstrating above-average risk-adjusted performance relative to category peers. 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.

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.

Parent

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