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First Trust, the Illinois-based ETF issuer best known for its unique sector specific ETFs, recently announced plans for more funds utilizing its proprietary AlphaDEX methodology. In the recent filing with the SEC, the company revealed some of the initial information regarding seven new funds, each targeting a specific nation with the company’s unique weighting scheme. While details regarding ticker symbols and top holdings were not released, we have highlighted some of the key info from the preliminary filing on these funds below:
Germany AlphaDEX Fund
For a new way to play the German market, First Trust looks to one day give investors exposure to this fund which tracks the Defined Germany Index. The product will have a cost of 80 basis points a year and will only include companies that have float adjusted market values of at least $100 million and annual dollar value trading levels of at least $50 million. The main competition looks to be from the ultra-popular iShares MSCI Germany Index Fund (EWG - ETF report). This product tracks the broad German economy and has an expense ratio of 51 basis points as well as close to $2.3 billion in AUM (read German Bond ETFs In Focus).
Canada AlphaDEX Fund
In the often overlooked Canadian market, investors may soon have the chance to buy this proposed ETF which looks to follow the Defined Canada Index. Much like its German counterpart, this fund will cost investors 80 basis points a year and will cover companies that have float adjusted market values of at least $100 million and annual dollar value trading levels of at least $50 million. Competition looks to once again come from iShares and the firm’s MSCI Canada Index Fund (EWC - ETF report). This product charges investors 52 basis points a year in fees and has quite the lead in AUM with nearly $4.48 billion in total capital under management.
Australia AlphaDEX Fund
Thanks to the nation’s wide range of commodities, Australia has become increasingly popular with investors recently. For those looking to make a bet on the nation, First Trust’s proposed fund, which tracks the Defined Australia Index, could eventually be an interesting choice. The fund looks to charge investors 80 basis points a year in fees and will employ the firm’s equal-dollar weighting methodology in order to achieve exposure to the nation. For competition, the MSCI Australia Index Fund (EWA - ETF report) looks to be a formidable foe as the fund charges investors 52 basis points in fees and has close to $2.6 billion in assets under management (read Top Three Currency ETFs).
United Kingdom AlphaDEX Fund
If an investor is looking to make a bet on Europe but is uncertain of the future of the euro zone, the UK is often a top choice for many. Current options are limited, but If First Trust is able to negotiate its way past the regulatory issues, investors will soon have another choice in the space with a fund that tracks the Defined United Kingdom Index. This product also looks to charge investors 80 basis points a year in fees, and like the rest on this list, no ticker symbol or top holdings info was made available. For investors seeking another way to play the market in the meantime, the iShares MSCI United Kingdom Index Fund (EWU - ETF report) is one of the only ways to play the market right now. The fund has nearly $1.3 billion in AUM and charges investors 0.52% a year in fees, suggesting that if First Trust can get their AlphaDEX product out there it could face some stiff competition.
Taiwan AlphaDEX Fund
For investors looking for a more emerging play, an ETF tracking the Taiwanese market could be an interesting choice. This proposed fund looks to follow the Defined Taiwan Index which gives exposure to firms that have float adjusted market values of at least $100 million across the nation. Total fees once again come in at 80 basis points, making the fund competitive with other funds tracking the nation. In fact, (EWT - ETF report), the main ETF from iShares tracking the nation, charges investors 0.59% a year in fees for its services, putting the proposed fund from First Trust close in terms of total costs. However, it should be noted that EWT does have over $2 billion in AUM, so the company will have a long way to go on that front (read Time To Get Regional With Bond ETFs).
Hong Kong AlphaDEX Fund
The city of Hong Kong continues to surge in importance as the area becomes the key gateway to mainland China. For those seeking a new way to play the market, the eventual launch of this AlphaDEX fund could be welcomed news and could offer alpha over traditional benchmarks. The fund does look to charge investors 80 basis points a year in fees and have similar stipulations to the other funds on this list in terms of minimum liquidity and size requirements for investment. In terms of competition, iShares’ MSCI Hong Kong Index Fund (EWH - ETF report) looks to be the biggest challenger, as the fund has close to $1.8 billion in AUM. Surprisingly, the fund charges just 52 basis points a year in fees, in line with other more Western-focused products. This suggests that the proposed fund from First Trust will have to generate some serious alpha to overcome this expense hurdle.
Switzerland AlphaDEX Fund
Given the broad uncertainty in Europe, many investors have pushed into ultra-safe markets such as the one in Switzerland. For those looking for this safety, this proposed fund could eventually be an intriguing alternative for investors. The fund, like the rest of the products on the list, charges 80 basis points a year in fees and has stipulations regarding the minimum size of securities that can be included in the benchmark. Of the funds on the list, the Switzerland space may be the least dominated by a particular fund. In fact, the MSCI Switzerland Index Fund (EWL - ETF report) from iShares has just under $500 million in assets, far lower than many other products on the list. Nevertheless, the ETF charges just 52 basis points a year in fees, providing a relatively steep alpha-hurdle for First Trust (see Three Best Gold ETFs).
Some investors may be wondering what ‘AlphaDEX’ really means or how the process is conducted. Investors should note that the idea is pretty simple as it looks to eliminate some of the lowest ranked stocks from the benchmark while giving higher weightings to firms that achieve top ratings. First, all the component stocks in a benchmark are ranked separately on both growth and value factors. Generally speaking, the top fifty ranked stocks in the benchmark are then divided into quintiles and each equity is ranked equally within each quintile with more assets going towards top rated groups. This process is done and the stocks are rebalanced semi-annually (ok maybe it isn’t that simple).
While the products can achieve alpha, investors should note some of the downsides to the strategy. First, the funds generally have far fewer holdings than their market cap weighted counterparts, exposing them to greater individual security risk. Additionally, the costs are often much higher for AlphaDEX funds although the differential can be pretty low for some of the emerging markets of the world. Nevertheless, for investors seeking a more ‘active’ approach to their ETF investing, any of these AlphaDEX funds could make for an interesting choice (also see Inside The Cloud Computing ETF).
Current AlphaDEX lineup
If approved, the funds would find a home among the company’s already large lineup of AlphaDEX funds. Beyond ETFs that employ the methodology as it relates to U.S. sectors, the company also has a slew of funds targeting various regions and nations around the globe. Among these, the company has several emerging market focused AlphaDEX funds—such as those tracking Brazil (FBZ - ETF report) and Latin America (FLN - ETF report)—as well as developed market funds—such as those tracking the broad region (FDT - ETF report) and Japan (FJP - ETF report).
The new additions should greatly help the company round out its line of AlphaDEX funds targeting developed markets and give investors much needed choices in each of these countries. Whether the funds can outperform more traditional products, however, remains to be seen, as well as if investors will be willing to pony up for these more expensive funds. The track record of the current lineup of country specific funds in the AlphaDEX world is very mixed with several outperforming but unable to attract inflows, so it will be interesting to see if these other developed market funds can break this trend and generate assets from a wide swath of the investing public.
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