First Trust Advisors L.P. was established as a registered investment advisor in 1991. The Chicago-based firm manages USD104.9bn of assets (as of end-2014), of which some USD33.4bn are held in ETFs. In December 2011, UK-based First Trust Global Portfolios Ltd was established to distribute its ETF product range in Europe within an affiliated Irish domiciled UCITS Company, First Trust Global Funds plc.
“2014 was an extraordinary year,” reflects Eric Anderson (pictured), senior vice president at First Trust Advisors. “In addition to launching 16 new ETFs around the globe, First Trust realised inflows of USD11.9bn globally.”
First Trust uses an enhanced indexing approach to generate above average returns. Rather than replicating traditional index models, enhanced indexing builds on the basic principles of index construction with an emphasis on generating alpha.
The First Trust methodology is referred to as AlphaDEX®. All AlphaDEX® ETFs are designed to track the performance of a group of enhanced indexes, each of which utilises the proprietary, rules-based AlphaDEX fundamental stock selection methodology.
The AlphaDEX® family of funds consists of a diverse range of sector, style, multi cap, and international funds. In total, First Trust offers 40 of these funds in the US, four in Europe and another 13 in Canada.
To summarise, the methodology works as:
• Begin with the constituents of a broad-based index and rank all stocks on growth and value factors to determine a growth and value score
• Based on style designations, determine each stock’s selection score. Stocks designated as core or blend receive the better growth or value score.
• Rank all stocks by their final selection score and eliminate the lowest 25%.
• Place the remaining stocks into quintiles based on their selection score rank. The top quintile stocks get a total weight of 5/15ths, the second quintile stocks get a total weight of 4/15ths, etc. Each stock is equally-weighted within its quintile.
• Repeat the process semi-annually, rebalancing and reconstituting the index.
“Simply put, we offer ETFs that track enhanced indices; indices that are based on investment merit not size. Our AlphaDEX® indices were designed for investment purposes. Traditional beta or market cap-weighted indices were initially designed for market measurement, and have subsequently become investment indices,” comments Anderson.
To illustrate the enhanced performance provided by the AlphaDEX® methodology, the First Trust UK AlphaDEX® Fund, which tracks the Defined UK Index, is up 3.8 per cent YTD compared to 2.9 per cent for the FTSE 100 TR Index.
Last year, Anderson confirms that the most popular products, in terms of net inflows, included the following:
• FV (First Trust Dorsey Wright Focus 5 ETF): USD1.2bn
• FXG (First Trust Consumer Staples AlphaDEX® Fund): USD896m
• FXD (First Trust Consumer Discretionary AlphaDEX® Fund): USD792m
• FEX (First Trust Large Cap Core AlphaDEX® Fund): USD744m.
Innovation is an often-used term in the financial industry but First Trust is entitled to describe its approach to ETF provision in those terms.
“About 10 years ago we started down the path of creating indices that emphasised rules-based fundamental stock selection – we didn’t call it smart beta. We first launched such a product in 2007 in the US, long before the ‘smart beta’ fad of recent times took off,” confirms Anderson, adding that several new product launches are in the pipeline.
