Neither people nor process stand out at First Trust IndXX NextG ETF, but it gets enough right to help this strategy retain its Morningstar Medalist Rating of Bronze. The portfolio maintains a cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 The strategy’s management team earns an Average People Pillar rating. The strategy gets an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in quality exposure and has a significant overweight in yield exposure compared with category peers. Low quality exposure is attributed to stocks with higher financial leverage and lower profitability. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. 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

NVIDIA

Micron Technology

Broadcom

Marvell Technology

Juniper Networks

QUALCOMM

Arista Networks

Advanced Micro Devices

Qorvo

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 IndXX NextG ETF earns an Average Process Pillar rating. The main contributor to the rating is that this fund tracks an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The process is limited by the fund's unimpressive 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 investment strategy as stated in the fund's prospectus is:  The investment seeks investment results that correspond generally to the price and yield (before the fund's fees and expenses) of an equity index called the Indxx 5G & NextG Thematic Index.  The fund will normally invest at least 90% of its net assets (including investment borrowings) in the securities that comprise the index. The index is designed to track the performance of companies that have devoted, or have committed to devote, material resources to the research, and development and application of fifth generation ("5G") and next generation digital cellular technologies as they emerge. 

 The portfolio is overweight in communication services and real estate relative to the category average by 15.4 and 6.9 percentage points, respectively. The sectors with low exposure compared to category peers are technology and consumer cyclical, underweight the average by 15.2 and 4.4 percentage points of assets, respectively. The strategy owns 107 securities and its assets are more dispersed than the typical peer in the category. In the most recent disclosure, 16.2% of the fund’s assets were concentrated in the top 10 fund holdings, as opposed to the category average's 52.3%. And in closing, in terms of portfolio turnover, on a year-over-year basis, 14% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Average

Process

First Trust’s 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, indicating the 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.

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 Indxx NextG ETF

NXTG tracks a tiered-weighted index of global equities related to next generation digital cellular technologies.

Designed to provide broad exposure to the Technology - Telecom segment of the equity market, the First Trust Indxx NextG ETF (NXTG) is a passively managed exchange traded fund launched on 02/17/2011.

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