Exchange traded funds focusing on global markets, developed
and emerging markets, often share something in common with their
U.S. broad market and sector products. That being a dependence on
cap-weighting methodology or the allocation of the largest stocks
by market value at the top of the fund and the smallest names at
This scenario is seen time and time again with ETFs ranging
from the iShares MSCI Brazil Index Fund (NYSE:
) to the SPDR STOXX Europe 50 ETF (NYSE:
). EWZ is dominated by Brazilian large-caps such as Petrobras
) and Vale (NYSE:
) while familiar names such as Nestle (
), BP (NYSE:
) and Royal Dutch Shell (NYSE: RDS-A) dot FEU's top-10
Arguably the primary risk with cap-weighting methodology is
that in the wrong environment or when particular stocks fall out
of favor, an ETF's heavy exposure to a small amount of stocks
diminishes one of the major reasons for owning ETFs in the first
place. That reason being diversification.
First Trust, the Illinois-based ETF sponsor behind the
AlphaDEX suite of funds, has shown a different approach to
not only provides with more choices, it can generate superior
returns. The same can be said when it comes to global funds.
"The largest mega-caps don't outperform over time," said First
Trust ETF Strategist and Senior Vice President Ryan Issakainen in
an interview with Benzinga from the Morningstar ETF Conference in
Chicago that the AlphaDEX funds. "The law of large numbers says
it can't happen."
The AlphaDEX funds do not eschew the largest, most familiar
stocks. Rather, ETFs such as the First Trust Energy AlphaDEX Fund
) allocate less weight to stocks with the largest market values.
In the example of FXN, Chevron (NYSE:
) and Exxon Mobil (NYSE:
) combine for less than five percent of that fund's weight. That
compares with those two stocks representing almost 37 percent of
the Vanguard Energy ETF (NYSE:
What is important to note is that AlphaDEX sector funds have
shown a tendency to outperform traditionally weighted ETFs. That
provides the impetus for probing the performance of AlphaDEX
country and global funds against larger ETFs.
"The same applies to individual countries," Issakainen said.
"Look at Brazil. It is very concentrated in the largest stocks.
If Petrobras is the best performer we're (First Trust) going to
have a hard time outperforming, but generally, that is not the
The example of Brazil is relevant. The struggles of Petrobras,
Brazil's state-run oil giant, have plagued the iShares MSCI
Brazil Index Fund this year. That ETF is off 5.4 percent
year-to-date. Two different Petrobras securities account for over
17 percent of EWZ's weight. On the other hand, the First Trust
Brazil AlphaDEX Fund (NYSE:
) allocates less than 3.2 percent of its weight to Petrobras and
that fund is slightly positive on the year. FBZ debuted in April
2011 and has attracted $5.7 million in AUM.
Brazil is not the only example. The First Trust China AlphaDEX
) has outperformed the SPDR S&P China ETF (NYSE:
) by nearly 100 basis points this year. The First Trust United
Kingdom AlphaDEX Fund (NYSE:
) has topped the iShares MSCI United Kingdom Index Fund (NYSE:
Even with those superlatives, the AlphaDEX country funds have
yet to attract assets on part with direct rivals or the AlphaDEX
sector funds. FKU has almost $6.5 million in AUM after debuting
in February. FCA has just $3.1 million in AUM after launching in
Issakainen notes that many of the AlphaDEX country funds
currently have AUM totals that resemble where the sector funds
were at similar points in their life spans. Today, all nine of
the AlphaDEX sector funds have over $100 million in AUM.
"Our approach is unique,"Issakainen said. "We have a long-term
business we're buildings and don't launch products
First Trust, which has never closed an ETF, now issues 39
For more on AlphaDEX ETFs, click
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