Is First Trust Materials AlphaDEX ETF a Strong ETF Right Now?

A smart beta exchange traded fund, the First Trust Materials AlphaDEX ETF FXZ debuted on 05/08/2007, and offers broad exposure to the Materials ETFs category of the market.

What Are Smart Beta ETFs?

The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.

Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.

However, some investors believe in the possibility of beating the market through exceptional stock selection, and choose a different type of fund that tracks non-cap weighted strategies: smart beta.

Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.

This area offers many different investment choices, such as simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies; however, not all of these strategies can deliver superior results.

Fund Sponsor & Index

The fund is sponsored by First Trust Advisors. It has amassed assets over $371.37 million, making it one of the average sized ETFs in the Materials ETFs. Before fees and expenses, this particular fund seeks to match the performance of the StrataQuant Materials Index.

The StrataQuant Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.

Cost & Other Expenses

For ETF investors, expense ratios are an important factor when considering a fund's return; in the long-term, cheaper funds actually have the ability to outperform their more expensive cousins if all other things remain the same.

Annual operating expenses for FXZ are 0.62%, which makes it on par with most peer products in the space.

It has a 12-month trailing dividend yield of 1.62%.

Sector Exposure and Top Holdings

While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

For FXZ, it has heaviest allocation in the Materials sector --about 90.20% of the portfolio.

Looking at individual holdings, CF Industries Holdings, Inc. CF accounts for about 4.75% of total assets, followed by FMC Corporation FMC and Albemarle Corporation ALB.

FXZ's top 10 holdings account for about 42.04% of its total assets under management.

Performance and Risk

Year-to-date, the First Trust Materials AlphaDEX ETF has lost about -6.48% so far, and it's up approximately 2.79% over the last 12 months (as of 07/08/2024). FXZ has traded between $58.78 and $72.04 in this past 52-week period.

The fund has a beta of 1.20 and standard deviation of 24.45% for the trailing three-year period, which makes FXZ a medium risk choice in this particular space. With about 39 holdings, it has more concentrated exposure than peers.

Alternatives

First Trust Materials AlphaDEX ETF is a reasonable option for investors seeking to outperform the Materials ETFs segment of the market. However, there are other ETFs in the space which investors could consider.

Materials Select Sector SPDR ETF XLB tracks Materials Select Sector Index and the FlexShares Morningstar Global Upstream Natural Resources ETF GUNR tracks Morningstar Global Upstream Natural Resources Index. Materials Select Sector SPDR ETF has $5.42 billion in assets, FlexShares Morningstar Global Upstream Natural Resources ETF has $5.89 billion. XLB has an expense ratio of 0.09% and GUNR charges 0.46%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Materials ETFs.

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