Seeking Alpha

FMK
  First Trust Mega Cap AlphaDEX ETF - NYSEARCA

9/22/2014, 6:40 PM ET
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FMK Description
Investment Objective/Strategy - The First Trust Mega Cap AlphaDEX Fund is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the the Defined Mega Cap Index.

- The Defined Mega Cap Index is an “enhanced” index created and administered by Standard & Poor’s which employs the AlphaDEX® stock selection methodology to select stocks from the S&P US BMI universe that meet certain criteria.

- Standard & Poor’s constructs the Defined Mega Cap Index by ranking the 100 largest eligible stocks from the S&P US BMI universe on growth factors including 3-, 6- 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. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style.

- Each stock receives the best style rank from the previous step as its selection score.

- The top 50 stocks based on the selection score determined in the previous step comprise the “selected stocks”. The selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index. The stocks are equally-weighted within each quintile.

- Each stock is then tested in order of its selection score rank to check if the weight assigned to that stock is outside the sector weighting constraints, which are set at 15% above the benchmark weight.
o If the weight assigned to the stock, when added with the weight assigned to all higher ranking stocks in its sector, is greater than the constraint, then the stock’s weight is lowered to the highest rank in the next quintile. Stocks previously lower in rank then move up one rank. Such stocks in the lowest quintile that violate a constraint are removed from the portfolio and replaced by the highest scoring stock not originally selected, subject to sector constraints. This process continues until all the sector weightings meet the constraint.
- The index is reconstituted and rebalanced quarterly.
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Country: United States
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