Scores of technology exchange traded funds are on torrid paces this year as the sector is the best-performing group in the S&P 500. Most of these ETFs are heavy on the largest technology titans, such as Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT).
The First Trust Technology AlphaDEX Fund (NYSEArca: FXL) uses a different weighting methodology, but that has not prevented the fund from surging 19% year-to-date and from hitting a record high last Friday.
Traditional market capitalization-weighted funds are still the dominant offerings in the world of exchange traded funds, but data continue to point rapid, accelerating growth for alternatively-indexed ETFs.
First Trust’s AlphaDEX ETFs are based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Eight industry groups are represented in FXL. The ETF allocates over 53% of its combined weight to software and semiconductor stocks. None of FXL’s holdings command more than 2.5% of the ETF’s weight.
Semiconductor ETFs have recently been durable performers as semiconductor stocks are rebounding to steady the broader technology sector, but that does not mean the gains are over for this suddenly hot group. However, valuations are rising for chip stocks.
Even with asset-gathering and performance success of select AlphaDEX ETFs, investors should realize that there is no such thing as a free lunch on Wall Street. Said differently, not every AlphaDEX ETF is guaranteed to be a better replacement for its cap-weighted counterpart.
Still, FXL’s ascent this year is arguably stunning when considering it is large-cap technology stocks leading the sector higher and this ETF’s 77 holdings have a median market value of $12.2 billion. Additionally, Apple, Microsoft and Alphabet Inc. (NASDAQ: GOOG) are not among FXL’s top 10 holdings and those are three of this year’s best-performing mega-cap tech names.
While there are periods when FXL outperforms cap-weighted technology strategies, the ETF trails the cap-weighted S&P 500 Information Technology Index over the past five years though volatility between the ETF and that index are comparable.
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Tom Lydon’s clients own shares of Apple.