First Trust Mid Cap Growth AlphaDEX® ETF’s management team is rated Average, but a solid investment process still helps this strategy retain its Morningstar Medalist Rating of Silver. The portfolio maintains a cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The strategy's effective investment philosophy supports an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in volatility exposure and momentum exposure compared with category peers. High volatility exposure is attributed to companies with a higher standard deviation of returns. And momentum exposure is rooted in holding stocks currently on a winning streak. The strategy’s management team earns an Average People Pillar rating. 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 benchmark on a risk-adjusted basis over the long term. First Trust Mid Cap Growth AlphaDEX® Fd earns an Above Average Process Pillar rating. 

The leading factor in 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. Noteworthy risk-adjusted performance also contributes to the process. This can be seen in the fund's 10-year alpha calculated relative to the category average, which suggests that the managers have shown skill in their allocation of risk. 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 subpar success ratio suggests that the firm could do better across its fund lineup.

 This strategy tends to hold smaller, deeper value companies compared with its average peer in the Mid-Cap Growth Morningstar Category. Looking at additional factor exposure, this strategy has exhibited a tilt toward high-volatility stocks or the shares of companies with histories of the higher standard deviation of returns, compared with Morningstar Category peers in the last few years. 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 has had more exposure to high-momentum stocks over its peers in recent years. Momentum approaches bet that rising stocks will continue to rise and that lagging stocks will continue to lag. Compared with category peers, the strategy also had more exposure to the Momentum factor in the most recent month. Given the high trading volume of holdings, this fund also tilts toward liquid assets. More-liquid assets contribute to more-flexible exit strategies without price changes and tend to be a ballast during market selloffs. For example, if the portfolio faces successive redemptions in a short period of time, it will be less likely to suffer from a significant loss. In recent months, however, the strategy had less Liquidity factor exposure 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 industrials and consumer defensive relative to the category average by 8.4 and 3.4 percentage points, respectively. The sectors with low exposure compared to category peers are healthcare and financial services, underweight the average by 7.4 and 4.1 percentage points of assets, respectively. The portfolio is composed of 226 holdings and its assets are more dispersed than peers in the category. In particular, 9.4% of the strategy's assets are concentrated in the top 10 fund holdings, compared to the category’s 26.1% average. And in closing, in terms of portfolio turnover, on a year-over-year basis, 142% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Above Average

Process

First Trust’s  team is comparable to peers, resulting in 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 a Bronze asset-weighted average Morningstar Medalist Rating, indicating the potential to deliver positive alpha relative to the category median in aggregate. This group has successfully retained management talent, with no departures in the past five years. 

 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.

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

First Trust Mid Cap Growth AlphaDEX Fund

FNY tracks a tiered equal-weighted index of mid-cap growth stocks selected by AlphaDex selection methodology from the S&P 400 Index.

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