The First Trust Technology AlphaDEX Fund (NYSEArca: FXL) is among the myriad technology exchange traded funds that have recently been hitting record highs as the fund’s smart beta methodology proves advantageous for investors. The $662.5 million FXL once again joined the all-time high club on Thursday.
The tech sector could even see more free cash on hand if Congress proceeds with plans to cut down capital gains on repatriated earnings or follow in President-elect Donald Trump’s proposed repatriation tax holiday policy that would encourage large multi-national companies to bring back hundreds of billions of dollars in cash to the U.S. for possible use in dividends, deals or other projects. Trump plans to levy a 10% repatriation tax on U.S. companies’ overseas profits from foreign subsidiaries, compared to the current 35% tax rate.
FXL also features other significant differences compared to traditional technology ETFs, such as the Technology Select Sector SPDR (NYSEArca: XLK) and the Vanguard Information Technology ETF (NYSEArca: VGT).
Large institutional traders may enjoy the robust liquidity found in XLK, but long-term investors who are less concerned about day-to-date, bid-ask spreads may like the cheaper 0.10% expense ratio found in VGT, compared to XLK’s 0.14% expense ratio. With FXL, investors will not find the significant weights to tech titans such as Apple (NasdaqGS: AAPL) and Microsoft (NasadaqGS: MSFT) as they will find with an ETF like XLK or VGT.
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 77 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.
“While price increases for both DRAM and NAND flash memory are raising the outlook for the overall semiconductor market, it will also put pressure on margins for system vendors of smartphones, PCs and servers,” said Jon Erensen, research director at Gartner. “Component shortages, a rising bill of materials, and the prospect of having to counter by raising average selling prices (ASPs) will create a volatile market in 2017 and 2018,” according to a statement from industry research group Gartner.
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