First Trust Nasdaq Oil & Gas 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-lowest fee quintile among peers.  

 The team managing this passive strategy earns the strategy an Average People Pillar rating. The strategy gets an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight volatility exposure and liquidity exposure compared with category peers. High volatility exposure is attributed to companies with a higher standard deviation of returns. And a high liquidity exposure is rooted in stocks with higher trading volumes, lending managers more flexibility. The strategy's parent organization is industry standard, albeit with some strong attributes like overall attractive fees, but is held back by discontinuity among portfolio managers. This earns the firm an Average Parent Pillar rating.

Analyst Rating

Exxon Mobil

Chevron

ConocoPhillips

Marathon Petroleum

Occidental Petroleum

Valero Energy

Phillips 66

Cheniere Energy

EOG Resources

Pioneer Natural Resources

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 Nasdaq Oil & Gas ETF earns an Average Process Pillar rating. 

The leading factor in 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 seven years. Lastly, 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 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 skews toward smaller, more undervalued companies compared with its average peer in the Equity Energy 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 orientation tends to pay off most prominently when markets are hot. In recent months, the strategy was more exposed to the Volatility factor compared with its Morningstar Category peers as well. Given the high trading volume of holdings, this strategy has been exposed to liquid assets during these years. Such stocks may have less potential upside than illiquid holdings, but they are easier to trade during market downturns. Compared with category peers, the strategy also had more exposure to the Liquidity factor in the most recent month. In addition, this strategy has not maintained a defensive tilt, demonstrated by low exposure to the quality factor. This means the fund avoids holding firms that are consistently profitable, growing, and have solid balance sheets. Such positions do not tend to provide much ballast for a portfolio. In this month, however, the strategy had more exposure to the Quality factor than 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 energy by 11.8 percentage points in terms of assets compared with the category average, and its healthcare allocation is similar to the category. The sectors with low exposure compared to category peers are utilities and technology, with utilities underweighting the average portfolio by 6.8 percentage points of assets and technology similar to the average. The portfolio is positioned across 44 holdings and is quite concentrated. In particular, 56.5% of the fund’s assets are housed within the top 10 holdings, versus the category’s 48.8% 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 comparable to peers, resulting in an Average People Pillar rating. There’s a deep bench of seven managers listed on the fund. Experience on the team is abundant, with 19 years of average portfolio management experience. Together, they manage a total of 105 strategies, with mixed prospects. The asset-weighted average Morningstar Medalist Rating across the strategies is Neutral. This means, in aggregate, they are not positioned to deliver positive alpha relative to the category median.  

 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 Oil & Gas ETF

FTXN tracks an index composed of 50 US oil and gas companies. Holdings are selected by liquidity and weighted based on volatility, value and growth factors.

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