Last month, First Trust introduced a group of 13 new AlphaDEX ETFs. For some reason, the First Trust Mega Cap AlphaDEX Fund (FMK) was not part of that launch. This was corrected last Thursday (5/12/11) with the listing of FMK.
The AlphaDEX methodology (pdf) employs a proprietary, rules-based fundamental stock selection process using only three growth factors and three value factors. The growth factors are 3, 6, and 12-month price appreciation, sales to price, and one-year sales growth. The value factors are book value to price, cash flow to price, and return on assets.
First Trust Mega Cap AlphaDEX Fund (FMK) attempts to track the Defined Mega Cap Index, which currently consists of 50 stocks selected from the 100 largest in the S&P US BMI universe. Standard & Poor's creates and maintains the underlying index, which ranks the universe of stocks on the growth and value factors and then assigns each stock a score based on its best style rank. Stocks in the bottom 50% are eliminated, and the top 50% become the “selected stocks”. Selected stocks are then divided into quintiles, and the top-ranked quintiles receive a higher weight within the index. Stocks are equally-weighted within each quintile.
The process currently produces top holdings of Intel (INTC) 4.0%, Eli Lilly and Company (LLY) 3.7%, AT&T (T) 3.4%, Corning (GLW) 3.3%, and Marathon Oil (MRO) 3.3%. Sector representation includes Energy 28.4%, Technology 21.9%, Health Care 13.5%, and Consumer Discretionary 10.2%.
There are numerous existing offerings in the mega cap space, and all but one employ traditional capitalization weighting. The iShares S&P 100 Index Fund (OEF) is the current asset leader of the bunch and has an expense ratio of 0.20%. The only existing mega cap ETF not using capitalization weighting is the PowerShares Active Mega-Cap Portfolio (PMA). However, it is the category laggard for assets under management and has an expense ratio of 0.75%.
At 0.70%, FMK's expense ratio comes in at the high end and is only the second in the category to exceed 0.20%. Whether or not the AlphaDEX methodology deserves such a premium remains to be seen. Additional information is located in the FMK summary, FMK fact sheet (pdf), and prospectus (pdf).
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.
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