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 strategy’s management team earns an Average People Pillar rating. The strategy gets an Average Process Pillar rating.  High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. 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. 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

Exxon Mobil

ConocoPhillips

Marathon Petroleum

Chevron

Occidental Petroleum

Valero Energy

EOG Resources

Phillips 66

Devon Energy

Cheniere Energy

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 most substantial 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. Strong risk-adjusted performance also supports the rating. This can be seen in the fund's five-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 relatively low success ratio suggests that the firm could do better across its fund lineup.

 This strategy leans toward smaller, more undervalued companies compared with its average peer in the Equity Energy Morningstar Category. Examining additional factor exposure, this strategy has held more highly liquid stocks compared to Morningstar Category Peers in 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. Different from its historical appetite, however, the strategy was less exposed to the Liquidity factor compared with Morningstar Category peers in the most recent month. This strategy has also exhibited a tilt toward high-volatility stocks over these years, meaning it has invested in companies that have a higher historical standard deviation of returns. This is a higher-risk, higher-reward approach. Compared with category peers, however, the strategy had less Volatility factor exposure in the latest month. During the last few years, this strategy has also tilted in favor of high-quality stocks, those that have demonstrated low financial leverage and solid return on equity. This means the fund holds consistently profitable, growing companies with solid balance sheets that may help it endure downturns better than Morningstar Category peers. 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 energy by 12.8 percentage points in terms of assets compared with the category average, and its communication services allocation is similar to the category. The sectors with low exposure compared to category peers are utilities and industrials, with utilities underweighting the average portfolio by 7.3 percentage points of assets and industrials similar to the average. The strategy owns 43 securities and is relatively top-heavy. Of the strategy's assets, 57.5% are concentrated within the top 10 holdings, as opposed to the category’s 51.9% average. And in closing, in terms of portfolio turnover, on a year-over-year basis, 100% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Average

Process

First Trust’s team is valuable but does not stand out as one of the industry's best, warranting 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 22 years of 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.  

 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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