Increased confidence in First Trust Long/Short Equity ETF's prospects relative to its Morningstar Category peers results in  an upgrade in this strategy's Morningstar Medalist Rating to Neutral from Negative. The portfolio maintains a sizable cost advantage over competitors, priced within the second-lowest fee quintile among peers.  

 The team has personal investments in the strategy, but other weaknesses drive the strategy's Below Average People Pillar. The strategy earns an Average Process Pillar rating.  Momentum exposure is attributed to holding stocks currently on a winning streak and selling those that are on a downtrend. 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

Microsoft

Apple

NVIDIA

Amazon

Citigroup

Starbucks

AbbVie

Bristol-Myers

Gilead Sciences

Meta

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 Long/Short Equity ETF earns an Average Process Pillar rating. 

The main driver of the rating is the fund's impressive long-term risk-adjusted performance. This can be seen in its five-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 strengthens the process. Specifically, the fund has not seen a manager change in the last eight 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 modest success ratio suggests that the firm could do better across its fund lineup.

 This strategy targets smaller plays than its peers’ average in the Long-Short Equity Morningstar Category. But in terms of investment style, it is on par with peers. Analyzing additional factors, this strategy has consistently had exposure to high-momentum stocks compared with Morningstar Category peers over the past few years. Momentum is based on the premise that market outperformers will continue to outperform, and laggards will continue to lag. This means that managers are overweighting stocks currently on a winning streak. In recent months, the strategy was more exposed to the Momentum factor compared with its Morningstar Category peers as well. This strategy also has had an overweight bias to the volatility factor over these years, meaning it has owned 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, the strategy has constantly maintained a defensive tilt, with exposure to high-quality stocks. High exposure to the quality factor means holding companies that are consistently profitable, growing, and have solid balance sheets. In this month, the strategy also had more exposure to the Quality 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 technology and basic materials relative to the category average by 6.9 and 4.0 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and consumer cyclical, underweight the average by 5.9 and 4.0 percentage points of assets, respectively. The strategy owns 141 securities and is relatively top-heavy. Of the strategy's assets, 18.8% are concentrated within the top 10 holdings, compared to the typical peer's 11.9%. And in closing, in terms of portfolio turnover, on a year-over-year basis, 280% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Average

Process

First Trust Long/Short Equity ETF earns a Below Average People Pillar rating. The team is strengthened by the stability of the management team. Specifically, the fund has not seen a manager change in the last eight 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 outperformed 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 parent firm's five-year retention rate of 67% also detracts from the team.


John W. Gambla, the longest-tenured manager on the strategy, boasts over 25 years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 3.7 stars, demonstrating encouraging risk-adjusted performance. Despite having a small team, the two listed managers boast over 25 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

First Trust Long/Short Equity ETF

FTLS takes both long and short position in US-listed equity with US and foreign exposure. The actively managed funds will typically be 90-100% long and 0-50% short.

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First Trust Long/Short Equity ETF is an actively managed fund with a long-short stock strategy based on proprietary quantitative models. Valuation, growth, and quality metrics are superior to the S&P 500 benchmark.

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First Trust Long/Short Equity ETF is a unique investment vehicle that aims to provide long-term total returns with less volatility than the S&P 500 index. FTLS has historically outperformed during bear markets and has a low standard deviation compared to the S&P 500 and a higher Sharpe ratio. The fund has delivered an 11.5% return this year and has shown the ability to mitigate drawdowns while capturing upside potential.

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First Trust Long/Short Equity ETF uses earnings quality to pick stocks to go long and short. FTLS has delivered a solid historical performance that is commensurate with its mandate of reduced volatility and drawdowns. Compared to expense long/short equity hedge funds, the FTLS appears to be a good option as it has better performance and lower fees.

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