The combination of an Average People Pillar rating and a Below Average Process Pillar rating limit  First Trust Nasdaq Transportation ETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a cost advantage over competitors, priced within the second-lowest fee quintile among peers.  

 The strategy gets a Below Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in quality exposure and volatility exposure compared with category peers. High quality exposure is attributed to stocks with low financial leverage and strong returns on equity. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. 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

FedEx

General Motors

Ford Motor Company

Tesla

Delta Air Lines

PACCAR

United Rentals

Union Pacific

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 Transportation ETF earns a Below Average Process Pillar rating. 

The process benefits from the stability of the management team. Specifically, the fund has not seen a manager change in the last seven years. However, the rating is limited by the fund's weak long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the process has struggled over that period. The parent firm's inferior risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 2.7 stars, also weakens the process. A lower star rating suggests that the firm has struggled to outperform on a risk-adjusted basis.

 This strategy prefers smaller market-cap companies compared with the average fund in its peer group, the Industrials Morningstar Category.  But in terms of investment style, it is on par with peers. Looking at additional factor exposure, this strategy has consistently had a defensive tilt owing to its exposure to high-quality stocks over the past few years. High exposure to the quality factor means holding companies that are consistently profitable, growing, and have solid balance sheets. In recent months, the strategy was more exposed to the Quality 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. In addition, this strategy holds highly liquid companies. Such stocks may have less potential upside than illiquid holdings, but they are easier to trade during market downturns. In this month, the strategy also had more exposure to the Liquidity 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 consumer cyclical by 28.6 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 industrials and technology, underweight the average by 23.1 and 3.2 percentage points of assets, respectively. The portfolio is positioned across 42 holdings and is diversified among those holdings. In its most recent portfolio, 60.3% of the fund’s assets were concentrated in the top 10 fund holdings, compared to the category average's 69.8%. And finally, in terms of portfolio turnover, on a year-over-year basis, 71% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Below 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 22 years of average portfolio management experience. Together, they manage a total of 108 strategies, with a Bronze asset-weighted average Morningstar Medalist Rating, demonstrating their potential 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.

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 Nasdaq Transportation ETF

FTXR tracks an index composed of 30 US transportation companies. Holdings are selected by liquidity and weighted based on volatility, value and growth factors.

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