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

Launched on 05/08/2007, the First Trust Technology AlphaDEX ETF FXL is a smart beta exchange traded fund offering broad exposure to the Technology ETFs category of the market.

What Are Smart Beta ETFs?

For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.

Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.

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.

Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.

Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.

Fund Sponsor & Index

The fund is managed by First Trust Advisors. FXL has been able to amass assets over $1.24 billion, making it one of the larger ETFs in the Technology ETFs. Before fees and expenses, FXL seeks to match the performance of the StrataQuant Technology Index.

The StrataQuant Technology 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.

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

FXL's 12-month trailing dividend yield is 0.41%.

Sector Exposure and Top Holdings

It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

For FXL, it has heaviest allocation in the Information Technology sector --about 80.90% of the portfolio --while Industrials and Telecom round out the top three.

Taking into account individual holdings, Palantir Technologies Inc. (class A) PLTR accounts for about 2.06% of the fund's total assets, followed by Godaddy Inc. (class A) and Cognizant Technology Solutions Corporation CTSH.

FXL's top 10 holdings account for about 18.47% of its total assets under management.

Performance and Risk

Year-to-date, the First Trust Technology AlphaDEX ETF has lost about -0.82% so far, and is up about 9.32% over the last 12 months (as of 09/09/2024). FXL has traded between $104.07 and $142.51 in this past 52-week period.

The ETF has a beta of 1.14 and standard deviation of 25.32% for the trailing three-year period, making it a medium risk choice in the space. With about 103 holdings, it effectively diversifies company-specific risk.

Alternatives

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

Technology Select Sector SPDR ETF XLK tracks Technology Select Sector Index and the Vanguard Information Technology ETF VGT tracks MSCI US Investable Market Information Technology 25/50 Index. Technology Select Sector SPDR ETF has $64.13 billion in assets, Vanguard Information Technology ETF has $70.17 billion. XLK has an expense ratio of 0.09% and VGT charges 0.10%.

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

To read this article on Zacks.com click here.