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Is First Trust Materials AlphaDEX ETF (FXZ) a Strong ETF Right Now?

Making its debut on 05/08/2007, smart beta exchange traded fund First Trust Materials AlphaDEX ETF (FXZ) provides investors broad exposure to the Materials ETFs category of the market.

What Are Smart Beta ETFs?

The ETF industry has long been dominated by products based on market cap weighted indexes, a strategy created to reflect the market or a particular market segment.

A good option for investors who believe in market efficiency, market cap weighted indexes offer 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.

Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

The fund is managed by First Trust Advisors. FXZ has been able to amass assets over $1.51 billion, making it one of the larger ETFs in the Materials ETFs. FXZ, before fees and expenses, seeks to match the performance of the StrataQuant Materials Index.

The StrataQuant Materials 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

When considering an ETF's total return, expense ratios are an important factor. And, cheaper funds can significantly outperform their more expensive cousins in the long term if all other factors remain equal.

With one of the more expensive products in the space, this ETF has annual operating expenses of 0.64%.

The fund has a 12-month trailing dividend yield of 1.26%.

Sector Exposure and Top Holdings

ETFs offer diversified exposure and thus minimize single stock risk, but it is still important to delve into a fund's holdings before investing. Most ETFs are very transparent products and many disclose their holdings on a daily basis.

Representing 92.60% of the portfolio, the fund has heaviest allocation to the Materials sector.

Taking into account individual holdings, Reliance Steel & Aluminum Co. (RS) accounts for about 5.52% of the fund's total assets, followed by Steel Dynamics, Inc. (STLD) and Westlake Corporation (WLK).

FXZ's top 10 holdings account for about 44.95% of its total assets under management.

Performance and Risk

The ETF has lost about -2.38% and is up about 5.32% so far this year and in the past one year (as of 08/04/2022), respectively. FXZ has traded between $53.99 and $74.60 during this last 52-week period.

The fund has a beta of 1.22 and standard deviation of 32.64% for the trailing three-year period, which makes FXZ a medium risk choice in this particular space. With about 38 holdings, it has more concentrated exposure than peers.

Alternatives

First Trust Materials AlphaDEX ETF is an excellent option for investors seeking to outperform the Materials ETFs segment of the market. There are other ETFs in the space which investors could consider as well.

Materials Select Sector SPDR ETF (XLB) tracks Materials Select Sector Index and the FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR) tracks Morningstar Global Upstream Natural Resources Index. Materials Select Sector SPDR ETF has $5.98 billion in assets, FlexShares Morningstar Global Upstream Natural Resources ETF has $7.16 billion. XLB has an expense ratio of 0.10% and GUNR charges 0.46%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Materials ETFs.

Bottom Line

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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First Trust Materials AlphaDEX ETF (FXZ): ETF Research Reports
 
Westlake Corp. (WLK): Free Stock Analysis Report
 
Steel Dynamics, Inc. (STLD): Free Stock Analysis Report
 
Reliance Steel & Aluminum Co. (RS): Free Stock Analysis Report
 
Materials Select Sector SPDR ETF (XLB): ETF Research Reports
 
FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR): ETF Research Reports
 
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