By Michael Johnston:
First Trust announced the introduction of seven new single country international ETFs, dramatically expanding its lineup of international equity funds. Each of the new ETFs will be linked to indexes that utilize the AlphaDEX methodology that is used in a number of existing First Trust ETFs. The new ETFs are:
- Australia AlphaDEX Fund (NYSEArca:FAUS - News)
- Canada AlphaDEX Fund (NYSEArca:FCAN - News)
- Germany AlphaDEX Fund (NYSEArca:FGM - News)
- Hong Kong AlphaDEX Fund (NYSEArca:FHK - News)
- Switzerland AlphaDEX Fund (NYSEArca:FSZ - News)
- Taiwan AlphaDEX Fund (NYSEArca:FTW - News)
- United Kingdom AlphaDEX Fund (NYSEArca:FKU - News)
First Trust had initially expected to launch two additional ETFs targeting small cap stocks in developed and emerging markets, but didn’t begin trading for those funds yet:
- First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (:FDTS)
- First Trust Emerging Markets Small Cap AlphaDEX Fund (:FEMS)
FDTS and FEMS will begin trading on Thursday.
None of the new ETFs are first-to-market, as all of the regions represented are already covered by at least one existing ETF. FSZ is just the second ETF to offer exposure to Swiss stocks, joining the iShares MSCI Switzerland Index Fund (:EWL).
The AlphaDEX methodology involves a quantitative screening methodology designed to identify the stocks from a specific universe that have the greatest potential for capital appreciation. Specifically, stocks from the eligible universe are ranked on growth factors such as recent price appreciation, sales-to-price ratio, and one year sales growth, and separately on value factors such as book value to price ratio, cash flow to price ratio, and return on assets. Stocks with the highest scores are included in the benchmark, and the highest weightings are afforded larger weightings.
First Trust has offered several AlphaDEX ETFs targeting U.S. stocks for years, and many of those funds have now gathered significant asset bases thanks in part to impressive performances compared to “plain vanilla” cap-weighted indexes. Last year the company rolled out four country-specific international AlphaDEX ETFs, targeting Brazil (:FBZ), China (:FCA), Japan (:FJP), and South Korea (:FKO).
One potentially appealing attribute of the new ETFs relates to the balance maintained by the underlying portfolios. ETFs linked to cap weighted indexes have a tendency to maintain significant concentrations in a few mega cap companies, especially in international markets [see The Truth About Alternative Weighting Methodologies]. The AlphaDEX methodology, however, generally avoids significant concentrations in individual securities. The Australia AlphaDEX is a good example; FAUS allocates no more than 5% to any one name, while the MSCI Australia Index Fund (:EWA) gives a weighting of almost 15% to mining giant BHP Billiton.
In many cases, the AlphaDEX ETFs may also maintain sector allocations that are considerably different from products linked to cap-weighted indexes covering the same markets.
Disclosure: No positions at time of writing.
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