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Summary

  • The AlphaDEX ETFs are sector ETFs based on a strategy combining momentum and valuation.
  • A previous article concluded that it was not very efficient in the Consumer Discretionary sector.
  • This one shows that it works better in Consumer Staples, Health Care and Utilities.

The first article of this series (click here to read) introduced the AlphaDEX® ETFs by First Trust. They implement the same quantitative strategy in nine sectors of the GCIS classification. Each Russell 1000 stock is given a score based either on price momentum (if it is classified as a growth stock) or on fundamental ratios (if it is classified as a value stock). In each sector, the bottom 25% is eliminated and the rest is ranked and weighted regarding the score. Holdings are rebalanced quarterly. The previous article also explains why I chose the Select Sector SPDR® ETFs as benchmarks, and makes a first comparison in the Consumer Discretionary sector. The conclusion was that the AlphaDEX ETF had a slightly lower return and a slightly higher volatility than its benchmark since inception. This new article focuses on the AlphaDEX ETFs in defensive sectors: Consumer Staples (NYSEARCA:FXG), Health Care (NYSEARCA:FXH) and Utilities (NYSEARCA:FXU). The corresponding SPDR funds taken as benchmarks are respectively: [[XLP]], XLV and XLU.

Evaluation

My aim is to evaluate sector by sector the AlphaDEX ETFs by comparing their returns, volatilities, and risk-adjusted performance with their benchmarks since their inception.

The next table compares the AlphaDEX Funds with the iShares Russell 1000 ETF (NYSEARCA:IWB) and the appropriate Select Sector SPDR Funds since 5/10/2007.

Annualized Return

Maximum Drawdown

Sharpe ratio

Volatility (Std.dev.)

Correlation/ IWB

IWB

5.5%

-55.7%

0.11

23.4%

1

FXG

10.2%

-38.6%

0.33

21.5%

0.55

XLP

9.9%

-33.5%

0.38

18.5%

0.78

FXH

13.4%

-43.0%

0.4

25.8%

0.7

XLV

8.6%

-40.5%

0.28

20.4%

0.81

FXU

5.1%

-47.2%

0.08

26.6%

0.64

XLU

4.0%

-46.6%

0.05

20.9%

0.72

Dividends are reinvested. Statistics are calculated using OHLC price data (the maximum drawdown is an intraday value).

On this period, Utilities have lagged the Russell 1000 whereas Consumer Staples and Healthcare have outperformed it. In each of the three sectors, the AlphaDEX ETF has a better return than its benchmark. For Healthcare and Utilities, the risk adjusted performance is also better (Sharpe ratio), and it is slightly lower for Consumer Staples due to a higher volatility. Nevertheless, the Consumer Staples AlphaDEX ETF has an interesting characteristics as component of an all-weather portfolio: a low correlation with the global stock market. Indeed, a correlation of 0.55 is quite remarkable for a strategy without hedge.

The conclusion is different from the previous article. In defensive sectors, the AlphaDEX ETFs provide not only a positive alpha on a 7-year period covering all market conditions, but also a better or similar risk-adjusted performance, and a lower correlation with the market. A next article will continue the evaluation of AlphaDEX ETFs in the cyclical sectors.

Source: The AlphaDEX ETFs: Defensive Sectors (Part 2)