The combination of an Average People Pillar rating and a Below Average Process Pillar rating limit  First Trust Cnsmr Discret AlphaDEX® ETF to 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 gets a Below Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in yield exposure and liquidity exposure compared with category peers. High yield exposure is attributed to holding high dividend-paying or buyback stocks, and is suitable for income seekers outside of fixed-income. And a high liquidity exposure is rooted in stocks with higher trading volumes, lending managers more flexibility. 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

DraftKings

Macy's

Uber

PulteGroup

Under Armour

D.R. Horton

Royal Caribbean Cruises

Toll Brothers

Penn Entertainment

Lennar

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 Consumer Discret AlphaDEX®Fd 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 11 years. However, the rating is weakened by the fund's unremarkable 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 five-year retention rate of 68% also weakens the process.

 This strategy tends to hold smaller, more undervalued companies compared with its average peer in the Consumer Cyclical Morningstar Category. Looking at additional factor exposure, this strategy has continually had more high-yield exposure than the Morningstar Category average during recent years, with the portfolio holding more stocks with high dividend or buyback yields. High-yield stocks tend to be connected to more mature companies earning enough cash to return some to shareholders. At times, however, extreme market pressure can force them to cut their dividends, which hurts stock performance. In recent months, the strategy was more exposed to the Yield 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. 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. Compared with category peers, the strategy also had more exposure to the Liquidity factor in the most recent month. Additionally, the strategy had less exposure to high-momentum stocks compared with Morningstar Category peers in recent months. Momentum investors tend to expect stocks that have done well recently to continue to do so in the short term. Momentum approaches can entail higher turnover and trading costs since the top stocks can often change.  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 communication services and technology relative to the category average by 6.9 and 2.5 percentage points, respectively. The sectors with low exposure compared to category peers are consumer cyclical and basic materials, with consumer cyclical underweighting the average portfolio by 9.4 percentage points of assets and basic materials similar to the average. The strategy owns 122 securities and its assets are more dispersed than peers in the category. In particular, 14.7% of the portfolio's assets are concentrated in the top 10 fund holdings, as opposed to the category average's 50.8%. And in closing, in terms of portfolio turnover, this portfolio trades more frequently than the average peer in its category, which may result in higher trading costs for investors and cause a drag on performance.

Below Average

Process

First Trust’s equity 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. Experience on the team is abundant, with 20 years of average portfolio management experience. Together, they manage a total of 107 strategies, with a Bronze asset-weighted average Morningstar Medalist Rating, demonstrating their potential to deliver positive alpha relative to the category median in aggregate. This group has been working together for a while and has been successful in retaining talent compared to peers, with no departures in the last five years.  

 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

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