First Trust Nasdaq Semiconductor ETF's Average People Pillar and Process Pillar ratings result in a Morningstar Medalist Rating of Neutral. The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 The team managing this passive strategy earns the strategy 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 an overweight liquidity exposure and has a significant overweight in quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a high quality exposure is rooted in holding stocks that are consistently profitable, growing, and have solid balance sheets. The strategy's parent organization doesn't stand out, earning the firm an Average Parent Pillar rating. It has displayed a handful of investor-friendly attributes including overall low fees but is held back by discontinuity among portfolio managers.

Analyst Rating

Intel

Texas Instruments

QUALCOMM

Broadcom

Applied Materials

Micron Technology

Analog Devices

NXP Semiconductors

ON Semiconductor

Microchip Technology

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 Nasdaq Semiconductor ETF earns an 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. The process is limited by the parent firm's five-year risk-adjusted success ratio of 31%. 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 subpar success ratio suggests that the firm could do better across its fund lineup.

 This strategy leans toward smaller, deeper value companies compared with its average peer in the Technology Morningstar Category. Analyzing additional factors, this fund has constantly tilted toward stocks with higher trading volumes than its Morningstar Category Peers over the past few years. 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, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy also has tilted in favor of high-quality stocks, those that have demonstrated low financial leverage and solid return on equity, during these years. Such holdings could cause it to trail peers during economic booms, but help it better endure busts. In the most recent month, however, the fund's Quality exposure was in line with the Morningstar Category average. In addition, this strategy's holdings have included more companies with high dividend or buyback yields than peers over these years. High-yield stocks tend to be associated with more mature, profitable businesses that can grow as well as provide a stream of income. Such stocks could suffer, however, if setbacks force them to cut their dividends. In this month, the strategy also had more exposure to the Yield 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 by 21.2 percentage points in terms of assets compared with the category average, and its basic materials allocation is similar to the category. The sectors with low exposure compared to category peers are communication services and consumer cyclical, underweight the average by 8.3 and 5.5 percentage points of assets, respectively. The strategy owns 32 securities and is relatively concentrated. Specifically, 63.6% of the strategy's assets are housed within the top 10 holdings, compared with the category’s 48.5% average. And finally, in terms of portfolio turnover, this portfolio's holdings turn over more often than comparable products in its peer group, possibly resulting in higher costs for investors and 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 sizable bench of seven managers listed on the fund. The team is well equipped, with an average of 19 years of portfolio management experience. Together, they manage a total of 105 strategies, with a Neutral asset-weighted average Morningstar Medalist Rating, indicating the team will struggle 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 Nasdaq Semiconductor ETF

FTXL tracks an index of the most liquid US semiconductor companies, weighted according to factors related to value, volatility and growth.

FTXL owns a portfolio of semiconductor stocks and tracks the Nasdaq U.S. Smart Semiconductor Index. The semiconductor industry's inventory correction may not be over yet, and investors may want to wait for a pullback before investing. The semiconductor industry is expected to grow rapidly in the long run, but FTXL's valuation is currently high, posing downside risks.

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U.S. equities rallied during the Refinitiv Lipper fund-flows week ended March 29, 2023, but fund flows remained defensive. On the equity side of the equation, both equity ETF (-$12.6 billion) and conventional equity funds (-$7.9 billion) witnessed net outflows for the week.

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News for First Trust Nasdaq Semiconductor ETF ETF (FTXL)