A Structural Analysis of Smart Beta Fund FEX

(Continued from Prior Part)

The First Trust Large Cap Core AlphaDEX ETF (FEX) is a smart beta fund that mimics the performance of the Defined Large Cap Core Index. The underlying index follows the AlphaDEX model to identify high alpha stocks among the S&P 500 (SPY) universe for portfolio construction.

Similar to FEX, the FlexShares Quality Dividend Index ETF (QDF) uses a multifactor model for stock selection. The model is based on the profitability, management expertise, and cash flow of each stock. QDF seeks to track the investment result of the Northern Trust Quality Dividend Index. The graph below offers a fund flow and volume analysis of FEX and QDF.

The above graph shows that FEX has seen a significant increase in its fund inflow and volume since 2012, mainly due to its strong performance in the market over the year. The fund inflow of FEX has dropped significantly this year.

QDF’s fund inflow growth remained flat from 2012–2014 and had dropped further in 2015. Fund inflow provides excess cash to the manager of the fund, which helps to improve the fund’s performance. A constant growth in fund inflow is a sign of consistent performance and positive demand. From 2013, FEX saw a massive rise in its volume, surpassing the volumes of QDF by a considerable margin.

The top holdings of QDF include Wells Fargo (WFC), Home Depot (HD), and Apple (AAPL). FEX has NVIDIA Corp. (NVDA), Tegna (TGNA), Amazon.com (AMZN), and Applied Materials (AMAT) among its top holdings. A significant difference between FEX and QDF, apart from their stock selection model, is their portfolio structure.

FEX follows an equal weighted index, and its top ten holdings constitute just 5.20% of its total portfolio. QDF, on the other hand, has a rank-weighting system. Its top ten holdings contribute to 28.25% of the total portfolio’s performance.

In the next article, we’ll look more closely at FEX’s holdings.

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Browse this series on Market Realist:

• Part 1 - A Structural Analysis of the Smart Beta Fund FEX
• Part 2 - FEX Was Affected by the S&P 500’s Current Correction
• Part 4 - An Overview of FEX’s Alpha Holdings