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

Designed to provide broad exposure to the Energy ETFs category of the market, the First Trust Energy AlphaDEX ETF FXN is a smart beta exchange traded fund launched on 05/08/2007.

What Are Smart Beta ETFs?

Products that are based on market cap weighted indexes, which are strategies designed to reflect a specific market segment or the market as a whole, have traditionally dominated the ETF industry.

Market cap weighted indexes work great for investors who believe in market efficiency. They provide a low-cost, convenient and transparent way of replicating market returns.

On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

FXN is managed by First Trust Advisors, and this fund has amassed over $478.36 million, which makes it one of the larger ETFs in the Energy ETFs. This particular fund, before fees and expenses, seeks to match the performance of the StrataQuant Energy Index.

The StrataQuant Energy 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

Investors should also pay attention to an ETF's expense ratio. Lower cost products will produce better results than those with a higher cost, assuming all other metrics remain the same.

Operating expenses on an annual basis are 0.62% for this ETF, which makes it on par with most peer products in the space.

The fund has a 12-month trailing dividend yield of 2.02%.

Sector Exposure and Top Holdings

Most ETFs are very transparent products, and disclose their holdings on a daily basis. ETFs also offer diversified exposure, which minimizes single stock risk, though it's still important for investors to research a fund's holdings.

This ETF has heaviest allocation in the Energy sector - about 99.10% of the portfolio.

Looking at individual holdings, Valero Energy Corporation VLO accounts for about 4.23% of total assets, followed by Matador Resources Company MTDR and Nov Inc. NOV.

Its top 10 holdings account for approximately 39.22% of FXN's total assets under management.

Performance and Risk

The ETF has gained about 1.68% so far this year and is down about -4.04% in the last one year (as of 09/04/2024). In the past 52-week period, it has traded between $15.73 and $19.35.

The fund has a beta of 1.61 and standard deviation of 28.88% for the trailing three-year period, which makes FXN a high risk choice in this particular space. With about 41 holdings, it has more concentrated exposure than peers.

Alternatives

First Trust Energy AlphaDEX ETF is an excellent option for investors seeking to outperform the Energy ETFs segment of the market. There are other ETFs in the space which investors could consider as well.

Vanguard Energy ETF VDE tracks MSCI US Investable Market Energy 25/50 Index and the Energy Select Sector SPDR ETF XLE tracks Energy Select Sector Index. Vanguard Energy ETF has $8.22 billion in assets, Energy Select Sector SPDR ETF has $36.48 billion. VDE has an expense ratio of 0.10% and XLE charges 0.09%.

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

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