First Trust continued its wave of new product launches today, rolling out another member of its rapidly-expanding AlphaDEX suite. The new Mega Cap AlphaDEX Fund (FMK) will seek to replicate an index comprised of mega-cap U.S. stocks, employing a quant-based methodology to select components from the 100 largest stocks in the S&P US BMI universe. A number of First Trust’s market cap-specific and style-specific AlphaDEX ETFs recently passed their three year milestone, and the company unveiled a suite of international AlphaDEX ETFs earlier this year.
First Trust has been a pioneer in the field of “enhanced” index ETFs, offering a number of products that employ rules-based screens to whittle down a broad equity universe to a field of stocks that show the most promising outlook. First Trust ETFs are one of the many alternatives to market cap-weighting that have seen a surge in popularity in recent years, and the AlphaDEX ETFs have been particularly effective at generating alpha relative to products based on more traditional benchmarks.
Construction of the index underlying FMK is relatively straightforward, as are all the AlphaDEX ETFs. Stocks from the eligible universe are screened on growth factors such as sales to price ratios and one year sales growth rates and value factors such as book value to price, cash flow to price, and return on assets. Stocks with the highest score are selected to make up the index, and a tiered weighing methodology involving five quintiles is employed (meaning that the stocks with the highest scores receive the highest weighting). Stocks are equal-weighted within quintiles to ensure balance across the portfolio.
Despite the simplicity of the approach, the AlphaDEX methodology has turned in some impressive results. The Large Cap Core AlphaDEX Fund (FEX), for example, has beaten the S&P 500 by about 400 basis points annually over the last five years. Many of the other style/size specific ETFs have turned in similar results relative to cap-weighted counterparts, making First Trust one of the fastest growers among ETF issuers. First Trust’s market share nearly doubled between April 2010 and April 2011. No firm with at least $5 billion in assets saw a more rapid increase in share over that period (four larger issuers saw market share decline).
After launching just three ETFs in 2010, First Trust has become one of the most active issuers from a product development perspective this year. With the addition of FMK, First Trust has now rolled out 17 new ETFs in 2011. Only iPath, which recently introduced a suite of “pure beta” commodity ETNs, has launched more new exchange-traded products in 2011. First Trust has rolled out more ETFs this year than iShares, State Street and Vanguard combined (those three firms account for about 80% of total U.S. ETF assets).
Mega Cap ETF Options
FMK joins a handful of existing ETFs that offer exposure to mega-cap equities. Those products include:
- iShares S&P 100 Index Fund (OEF)
- Vanguard Mega Cap 300 Index ETF (MGC)
- Rydex Russell Top 50 ETF (XLG)
OEF is the largest of the bunch with assets of about $3 billion and close to 900,000 shares traded daily. MGC charges an expense ratio of just 13 basis points, considerably lower than the 0.70% charged by FMK. Because the underlying mega-cap index is also brand new, no meaningful comparisons of historical performance are possible. But if FMK is able to match the performances turned in by other members of the AlphaDEX suite, investors may be more than happy to pony up a few extra basis points in annual fees.
Disclosure: No positions at time of writing.
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