First Trust Health Care AlphaDEX® ETF's Average Process Pillar and People 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 receives an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in quality exposure and liquidity exposure compared with category peers. A high quality exposure means holding stocks that are consistently profitable, growing, and have solid balance sheets. 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

Roivant Sciences Ltd

United Therapeutics

Shockwave Medical

Encompass Health

Natera

Medpace Holdings

Cigna

Viatris

DaVita

HCA Healthcare

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 Health Care AlphaDEX® Fund earns an Average Process Pillar rating. 

This fund tracks an index, which increases its process rating. Historical data, such as Morningstar's Active/Passive Barometer, shows that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The process is limited 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.

 This strategy tends to hold smaller, more value-oriented companies compared with its average peer in the Health Morningstar Category. 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. Though it may trail peers during an economic boom, this orientation contributes to helping it weather periods of economic stress better. In recent months, the strategy was more exposed to the Quality 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. This gives the managers more flexibility during bear markets to sell without adversely affecting prices. Compared with category peers, the strategy also had more exposure to the Liquidity factor in the most recent month. Additionally, this strategy has demonstrated a tilt toward low-volatility stocks in these years, meaning companies with a lower historical standard deviation of returns over its peers. These low-risk stocks are typically at their best when markets are not. Low volatility exposure contributes to limited loss on the downside at the cost of a lag in bull markets. In recent months, the strategy also had less Volatility factor exposure 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 has allocations in its top two sectors, industrials and basic materials, that are similar to the category. The sectors with low exposure compared to category peers are healthcare and technology; however, the allocations are similar to the category. The strategy owns 86 securities and its assets are more dispersed than peers in the category. In particular, 21.7% of the portfolio's assets are concentrated in the top 10 fund holdings, as opposed to the typical peer's 38.7%. And in closing, in terms of portfolio turnover, looking at year-over-year movements, 94% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

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. The team is well equipped, with an average of 22 years of 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. This group has had relatively low management turnover, providing a stable environment and continuity for the strategies. 

 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 Health Care AlphaDEX Fund

FXH tracks a tiered, equal-weighted index of large- and mid-cap US health care companies. Holdings are selected and weighted based on various growth and value criteria.

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For the First Trust Health Care AlphaDEX Fund ETF, we found that the implied analyst target price for the ETF based upon its underlying holdings is $85.29 per unit.

Add Up The Pieces: The First Trust Health Care AlphaDEX Fund ETF Could Be Worth $85

For the First Trust Health Care AlphaDEX Fund ETF, we found that the implied analyst target price for the ETF based upon its underlying holdings is $85.17 per unit.

Implied First Trust Health Care AlphaDEX Fund ETF Analyst Target Price: $85

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