Intelligent Indexing Works With Health Care ETFs, Too

ETF Trends

Last year, smart beta ETFs attracted $65.1 billion in new assets, nearly double the $34.2 billion hauled in by the group in 2012.

That does not mean these ETFs lack for detractors. There is no dearth of folks that doubt the efficacy of intelligent indexing or the concept’s ability to be effectively applied beyond broad market funds. Evidence does exist to support the notion that intelligent indexing has previously worked and can do so again in the future at the sector level. [Equal Weight ETFs for All]

The First Trust Health Care AlphaDEX Fund (FXH) is a prime example of smart beta sector ETF that has an impressive track record and is also delivering for investors in the here and now. No, it cannot be overlooked that health care has been one of just two (utilities is the other) S&P 500 sectors to generate positive returns this year, but FXH has surged more than 6% in 2014. That is better than the broader market and some large cap-weighted health care ETFs. [Health Care Delivers Despite Broader Market Struggles]

As is the case with the other AlphaDEX ETFs, FXH’s holdings are selected based on “growth factors including three, six 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,” according to First Trust.

The methodology has worked for FXH. In the past six years, FXH has only traded lower once while outpacing cap-weighted equivalents four times.

“Because the index is rebalanced quarterly, it is being refreshed with companies that have strong fundamental business characteristics. FXH currently has nearly $2 billion invested in 76 companies.  One of the benefits of this strategy is that you get a broader subset of healthcare stocks that include more small and mid-cap companies as opposed to just large-cap names,” according to FMD Capital.

The near-term risk to FXH is its 32.2% weight to health care providers and services names, the sub-sector that looks most vulnerable right now in otherwise sturdy group.  Pharmaceuticals, biotech and medical device names combine for 59% of FXH’s weight. [Obamacare ETF Could be in Trouble]

The almost $1.9 billion ETF is home to 74 stocks, none of which account for more than 3.1% of the fund’s weight. In a departure from the usual lineup of a cap-weighted health care ETF, just one old school pharmaceuticals company, Eli Lilly (LLY), appears in FXH’s top-10 lineup.

First Trust Health Care AlphaDEX Fund

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