Designed to provide broad exposure to the Technology ETFs category of the market, the First Trust Technology AlphaDEX ETF (FXL) is a smart beta exchange traded fund launched on 05/08/2007.
What Are Smart Beta ETFs?
For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.
Market cap weighted indexes work great for investors who believe in market efficiency. They provide a low-cost, convenient and transparent way of replicating market returns.
On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.
These indexes attempt to select stocks that have better chances of risk-return performance, based on certain fundamental characteristics or a combination of such characteristics.
Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.
Fund Sponsor & Index
Managed by First Trust Advisors, FXL has amassed assets over $1.33 billion, making it one of the larger ETFs in the Technology ETFs. FXL seeks to match the performance of the StrataQuant Technology Index before fees and expenses.
The StrataQuant Technology Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.
Cost & Other Expenses
Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.
Operating expenses on an annual basis are 0.62% for FXL, making it on par with most peer products in the space.
It has a 12-month trailing dividend yield of 0.41%.
Sector Exposure and Top Holdings
Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.
Representing 84.60% of the portfolio, the fund has heaviest allocation to the Information Technology sector; Industrials and Telecom round out the top three.
Taking into account individual holdings, Vertiv Holdings Co (class A) (VRT) accounts for about 2.58% of the fund's total assets, followed by Doordash, Inc. (class A) (DASH) and Cognizant Technology Solutions Corporation (CTSH).
Its top 10 holdings account for approximately 17.93% of FXL's total assets under management.
Performance and Risk
So far this year, FXL return is roughly 40.46%, and was up about 40.07% in the last one year (as of 01/01/2024). During this past 52-week period, the fund has traded between $91.07 and $129.36.
The ETF has a beta of 1.16 and standard deviation of 25.80% for the trailing three-year period, making it a medium risk choice in the space. With about 101 holdings, it effectively diversifies company-specific risk.
First Trust Technology AlphaDEX ETF is an excellent option for investors seeking to outperform the Technology ETFs segment of the market. There are other ETFs in the space which investors could consider as well.
Technology Select Sector SPDR ETF (XLK) tracks Technology Select Sector Index and the Vanguard Information Technology ETF (VGT) tracks MSCI US Investable Market Information Technology 25/50 Index. Technology Select Sector SPDR ETF has $58.58 billion in assets, Vanguard Information Technology ETF has $58.81 billion. XLK has an expense ratio of 0.10% and VGT charges 0.10%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Technology ETFs.
To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.