Weakness in First Trust RiverFront Dyn Em Mkts ETF's People and Process Pillar ratings limits this strategy to a Morningstar Medalist Rating of Negative. The portfolio maintains a cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 A recent bout of personnel turnover and other weaknesses drive the strategy's Low People Pillar. The strategy earns a Below Average Process Pillar rating.  High yield exposure is attributed to holding more stocks with high dividend or buyback yields. And a high quality exposure is rooted in holding stocks that are consistently profitable, growing, and have solid balance sheets. The strategy's parent organization earns the firm an Average Parent Pillar rating, and this rating is inherited from vehicles belonging to the same branding entity and is indirectly assigned by an analyst.

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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 RiverFront Dyn Em Mkts ETF earns a Below Average Process Pillar rating. 

The process benefits from the fund's strong long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. However, the rating is weakened 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 relatively low success ratio suggests that the firm could do better across its fund lineup. The parent firm's disappointing 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 leans toward smaller, more value-oriented companies than its average peer in the Diversified Emerging Mkts Morningstar Category. Looking at additional factor exposure, the managers have consistently overweighted yield-paying companies compared with Morningstar Category peers in recent years, shown by the portfolio's high exposure to stocks paying dividends or buying back shares. 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. This strategy also has tilted in favor of high-quality stocks, those that have demonstrated low financial leverage and solid return on equity, during these years. Such holdings could cause it to trail peers during economic booms, but help it better endure busts. Compared with category peers, the strategy also had more exposure to the Quality factor in the most recent month. In addition, this strategy has taken on exposure to high-momentum stocks in these 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. In this month, the strategy also had more exposure to the Momentum 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 technology and basic materials relative to the category average by 4.9 and 3.4 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and consumer cyclical, underweight the average by 3.9 and 3.8 percentage points of assets, respectively. The portfolio is composed of 137 holdings and is relatively concentrated. In particular, 27.9% of the fund’s assets are housed within the top 10 holdings, compared with the category’s 25.3% average. And finally, in terms of portfolio turnover, on a year-over-year basis, 90% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Below Average

Process

First Trust RiverFront Dyn Em Mkts ETF earns a Low People Pillar rating. The main detractor from the rating is the parent firm's five-year success ratio of 39%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median return for the period. The parent's modest success ratio suggests that the firm could do better across its fund lineup. The turnover of its management team also weakens the team. The fund last saw a manager change two months ago. The parent firm's five-year retention rate of 67% hinders the team further.


The team is backed by Chris Konstantinos, the longest-tenured manager on the strategy, who brings 23 years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 2.3 stars, reflecting below-average risk-adjusted performance relative to category peers. Despite having a small team, the two listed managers boast 23 years of listed portfolio management experience. Portfolio managers have made only a small personal investment in the fund, with the maximum investment by either manager being less than $10,000. That isn't close to being enough to align their interests with those of the strategy's investors.

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.

Average

Parent

First Trust RiverFront Dynamic Emerging Markets ETF

RFEM is actively-managed to select in emerging market stocks using multiple factors. The manager has discretion to hedge currency exposure up to 100% of the portfolio.

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Emerging markets continued to expand at a solid pace midway into the first quarter of 2024, supported by broad-based expansion across both manufacturing and service sectors.

Emerging Markets Growth Remains Solid Amid Intensifying Inflationary Pressures

News for First Trust RiverFront Dynamic Emerging Markets ETF ETF (RFEM)