Neither people nor process stand out at First Trust S&P 500 Div Fr CA Flw ETF, but it gets enough right to help this strategy retain its Morningstar Medalist Rating of Bronze. The portfolio maintains a cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 The strategy’s management team earns 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 a substantial overweight position in liquidity exposure and has a significant underweight in momentum exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. 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 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

Skyworks Solutions

Warner Bros Discovery Inc

Hewlett Packard

Cisco Systems

Synchrony Financial

Centene

AT&T

NetApp

Cognizant Technology Solutions

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 S&P 500 Div Fr CA Flw ETF earns an Average Process Pillar rating. The main driver of the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Management team experience, which averages 22 years at this fund, also contributes to the process. 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.

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 fees and expenses, of an equity index called the S&P 500 Sector-Neutral FCF Index.  Under normal conditions, and the fund will invest at least 80% of its net assets in the securities that comprise the index. The index measures the performance of companies within the S&P 500® Index that have the highest relative FCF Yield within each GICS® sector represented in the S&P 500® Index. It is non-diversified. 

 The portfolio is overweight in consumer cyclical by 2.7 percentage points in terms of assets compared with the category average, and its financial services allocation is similar to the category. The sectors with low exposure compared to category peers are industrials and healthcare; however, the allocations are similar to the category. The strategy owns 100 securities and is diversified among those holdings. In its most recent portfolio, 23.5% of the portfolio's assets were concentrated in the top 10 fund holdings, compared to the category’s 49.5% average. And in closing, in terms of portfolio turnover, this fund trades more frequently than its average peer, potentially racking up additional expenses for investors and creating 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 deep bench of seven managers listed on the fund. The team is well equipped, with an average of 22 years of portfolio management experience. Together, they manage a total of 108 strategies, with solid long-term prospects. The strategies average a Bronze asset-weighted Morningstar Medalist Rating, indicating a position to deliver positive alpha relative to the category median in aggregate.  

 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 S&P 500 Diversified Free Cash Flow ETF

FCFY tracks an index composed of the largest U.S. companies that are perceived to have strong free cash flow yields in comparison to other firms within the same GICS sector.

First Trust Advisors has launched a new ETF that invests in large-cap companies with high free cash flow (FCF) yield. The First Trust S&P 500 Diversified Free Cash Flow ETF (NYSE Arca: FCFY) seeks to replicate the performance of the S&P 500 Sector-Neutral FCF Index.

With FCFY, First Trust Targets Companies With High Free Cash Flow Yield

WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. (“First Trust”), a leading exchange-traded fund (“ETF”) provider and asset manager, announced today that it has launched a new ETF, the First Trust S&P 500 Diversified Free Cash Flow ETF (NYSE Arca: FCFY) (the “fund”). The fund seeks investment results that correspond generally to the price and yield (before the fund's fee and expenses) of an equity index called the S&P 500® Sector-Neutral FCF Index (the “index”). “As an independ.

News for First Trust S&P 500 Diversified Free Cash Flow ETF ETF (FCFY)