In keeping with our theme of the week and analyzing ETF/Index alternatives to traditional market capitalization weighted strategies, today we talk about the First Trust “AlphaDEX” core U.S. equity products.
FEX (First Trust Large Cap Core AlphaDEX), FNX (First Trust Mid Cap Core AlphaDEX), and FYX (First Trust Small Cap Core AlphaDEX) will be today’s focus, as each strategy is designed to isolate stocks from known S&P indexes. FEX, according to the AlphaDEX methodology, owns the top 75% of stocks in the S&P 500 Index ranked according to proprietary fundamental metrics including three, six, and 12-month price appreciation, sales to price and one year sales growth, book value to price, cash flow to price, and return on assets.
Similarly, FNX and FYX use the AlphaDEX methodology to isolate stocks on a fundamentally weighted basis from the S&P 400 Midcap and S&P 600 SmallCap Indexes. How has this fundamentally driven approach to ETF investing worked against the benchmarks over time? Since inception in May of 2007, FEX has rallied 2.12% versus the S&P 500 Index down 4.58% during this same time period. FNX is up 22.80% versus the S&P 400 MidCap Index up 13.56% since 2007 inception, and FYX has outpaced the S&P 600 SmallCap Index 11.65% versus 8.08%.
The AlphaDEX methodology also incorporates an “equal weighting” of the stocks that are selected for the overall portfolio (the top 75%), and the index itself is reconstituted (members may be added/deleted based on improving or deteriorating fundamentals) and re-balanced on a quarterly basis. As one might imagine, a fundamentally weighted index would vary significantly head to head against a market cap weighted index (calculated by share price times shares outstanding) in terms of individual equity weightings.