The combination of an Average People Pillar rating and a Below Average Process Pillar rating limit  First Trust Multi-Manager Sm Cp Opps ETF to a Morningstar Medalist Rating of Negative.  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 a significant overweight position in liquidity exposure and momentum exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And momentum exposure is rooted in holding stocks currently on a winning streak. 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

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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 Multi-Manager Sm Cp Opps ETF earns a Below Average Process Pillar rating. 

The process benefits from the experience of the management team, which averages 20 years at this fund. However, the rating 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 modest success ratio suggests that the firm could do better across its fund lineup. The parent firm's subpar risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 2.7 stars, also limits the process. A lower star rating suggests that the firm has struggled to outperform on a risk-adjusted basis.

 This strategy has tended to hold more growth stocks than others in the Small Growth Morningstar Category. But in terms of market capitalization, it is on par with peers. Analyzing additional factors, this strategy has consistently tilted toward companies with relatively higher trading volumes in the last 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. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy has also had more exposure to high-momentum stocks in recent years. Momentum strategies wager that market outperformers will continue to outperform, and laggards will continue to lag. Higher exposure to the former could mean the managers are overweighting stocks on winning streaks. Compared with category peers, the strategy also had more exposure to the Momentum factor in the most recent month. Additionally, the managers have consistently taken on more risk, demonstrated by higher volatility exposure than peers. Such stocks tend to rise faster and fall harder than the broad market. High-volatility exposure contributes to stronger performance during bull markets, but often at the cost of losing more during downturns. In this month, the strategy also had more exposure to the Volatility 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 and industrials relative to the category average by 4.1 and 3.6 percentage points, respectively. The sectors with low exposure compared to category peers are consumer cyclical and real estate, with consumer cyclical underweighting the average portfolio by 2.7 percentage points of assets and real estate similar to the average. The portfolio is composed of 194 holdings and is less top-heavy than peers. Specifically, 16.2% of the fund’s assets are concentrated within the top 10 fund holdings, as opposed to the category’s 26.3% average. And finally, in terms of portfolio turnover, on a year-over-year basis, 79% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Below Average

Process

First Trust Multi-Manager Sm Cp Opps ETF earns an Average People Pillar rating. Ryan Edward Crane’s veteran status, with over 25 years of listed portfolio management experience, brings a wealth of experience to the table. The average Morningstar Rating of the strategies they manage is 3.5 stars, demonstrating above-average risk-adjusted performance versus category peers. A large cast of 14 additional named managers adds to the team's appeal, averaging 20 years of listed portfolio management experience.  The highest personal investment in the fund by any of its managers is between $100,000 and $500,000. That's on the low side--it would need to be more than $1 million for us to see the investment as sufficient to promote the strong alignment of their interests with the strategy's investors. 

 Note: The People Pillar rating is indirectly assigned by an analyst. The longest-tenured manager of the fund also manages a different product rated by an analyst. Their analyst-assigned People Pillar rating is combined here with the People scores (algorithmic or analyst-assigned) for the fund’s other managers on a tenure-weighted basis.

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 Multi-Manager Small Cap Opportunities ETF

MMSC is an actively managed ETF that utilizes a multi-manager approach to provide exposure to small-cap US growth stocks.

JPMorgan BetaBuilders U.S. Small Cap Equity ETF

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Though small-cap stocks underperformed the mega-cap stocks this year, things could turn in favor of the pint-sized stocks now.

Are the Tables Turning for Small-Cap ETFs?

On Thursday, First Trust Advisors L.P., a leading ETF provider and asset manager, announced the launch of a new actively managed ETF, the First Trust Multi-Manager Small Cap Opportunities ETF (NYSE Arca: MMSC).

First Trust Launches the First Trust Multi-Manager Small-Cap ETF, MMSC

WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. (“First Trust”), a leading exchange-traded fund (“ETF”) provider and asset manager, announced today that it has launched a new actively managed ETF, the First Trust Multi-Manager Small Cap Opportunities ETF (NYSE Arca: MMSC) (the “fund”). The fund seeks to provide long-term capital appreciation by investing in equity securities issued by small capitalization companies. The fund's portfolio is managed by First Trust Advisors L.P. (“First

News for First Trust Multi-Manager Small Cap Opportunities ETF ETF (MMSC)