First Trust Mid Cap Value AlphaDEX® ETF's Average People Pillar and Process Pillar ratings result in a Morningstar Medalist Rating of Neutral. The portfolio maintains a cost advantage over competitors, priced within the cheapest fee quintile among peers.  

 The strategy’s management team earns an Average People Pillar rating. The strategy earns an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight volatility exposure and has a considerable overweight in yield exposure compared with category peers. High volatility exposure is attributed to companies with a higher standard deviation of returns. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. 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

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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 Mid Cap Value AlphaDEX® Fund earns an Average Process Pillar rating. 

The main contributor to 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. The stability of the management team also contributes to the process. Specifically, the fund has not seen a manager change in the last 11 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 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.

 This strategy skews toward smaller, deeper value companies compared with its average peer in the Mid-Cap Value Morningstar Category. Examining additional factor exposure, the managers have continually shown a willingness to take risks over the last few years, demonstrated by the portfolio's high volatility exposure. This is a higher-risk, higher-reward approach. In recent months, the strategy was more exposed to the Volatility factor compared with its Morningstar Category peers as well. This strategy's portfolio also has had exposure to more stocks with high dividend or buyback yields over peers in these years. Stocks with high yields can be more stable, mature companies, but at times extreme market pressure or fundamental deterioration may prompt them to cut their dividends, which tends to hurt stock performance. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. Given the high trading volume of holdings, this fund also holds highly liquid assets. This gives the managers more flexibility during bear markets to sell without adversely affecting prices. In this month, the strategy also had more exposure to the Liquidity 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 consumer cyclical and energy relative to the category average by 12.5 and 6.7 percentage points, respectively. The sectors with low exposure compared to category peers are industrials and consumer defensive, underweight the average by 6.4 and 4.7 percentage points of assets, respectively. The strategy owns 226 securities and is diversified among those holdings. In its most recent portfolio, 8.3% of the fund’s assets were concentrated in the top 10 fund holdings, as opposed to the category’s 17.3% average. And in closing, in terms of portfolio turnover, looking at year-over-year movements, 102% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

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 22 years of average 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. 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

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