The crisis in Ukraine is forcing Germany to address its reliance on Russia for its energy consumption, especially with respect to gas.
“We need to admit that in the past we have been too reliant on Russian imports,” said Germany’s environment and economy minister Robert Habeck. “In the medium and long term, we are going to significantly reduce the consumption of fossil fuels.”
Investors looking to get factor-based exposure to German equities can look to the First Trust Germany AlphaDEX® Fund (FGM). The fund seeks investment results that correspond to the NASDAQ AlphaDEX® Germany Index.
Nasdaq constructs the index by ranking eligible stocks from the NASDAQ Germany Index based on growth factors. This includes 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.
As of March 4, the fund eschews heavy concentrations in utilities, which comprises about 9% of the fund. As Germany addresses its energy concerns, investors can look to this ETF for broad market exposure with a factor-based twist.
A Discernible Ranking Strategy
All stocks are ranked on the sum of ranks for the growth and value factors. A stock must have data for all growth and/or value factors to receive a rank for that particular style, then each stock receives the best style rank from the previous step as its selection score.
The top 40 stocks are separated into quintiles according to their rankings, and the top-ranking quintiles will get more heavily weighted in the index. The stocks are equally weighted within each quintile.
Each stock undergoes a test in order of its selection score rank to check whether the assigned weight is outside the sector weighting constraints, which are set at 15% above the benchmark weight. If the weight assigned to the stock is greater than the constraint, then the stock’s weight is lowered to the highest rank in the next quintile.
Stocks previously lower in rank then move up one rank. Such stocks in the lowest quintile that violate a constraint are removed from the portfolio and replaced by the highest scoring stock not originally selected, subject to sector constraints.
The selection process continues until all the sector weightings meet the constraint. The fund comes with an expense ratio of 80 basis points.
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