'Little' First Trust Enjoying Banner Year

Huge inflows into a single ETF tell the tale of a firm that’s on a roll.

Reviewed by: etf.com Staff
Edited by: etf.com Staff

Huge inflows into a single ETF tell the tale of a firm that’s on a roll.

Last week an ETF from First Trust pulled in a huge amount of new money—going from basically no assets to more than $500 million. Those flows into the First Trust Enhanced Short Maturity Fund (FTSM) were the tip-of-the-iceberg sort of development, the latest reflection of what’s going right at the Wheaton, Illinois-based firm.

Sizable inflows into any fund is the sort of thing we take note of as we track Daily ETF Flows. We ask ourselves: “What was that about; was it a one-off fluke or did it tell a deeper story?”

With First Trust, this is a deeper story, and that story goes like this: This is a small but growing privately held fund company with $29 billion in assets that’s slowly but surely broadening its footprint in the ETF industry.

First Trust is doing that by marketing an array of funds with varying approaches that, together, reflect many crosscurrents in the contemporary fund landscape. Investors of all stripes kicking the tires at First Trust will find quality and variety and low costs. Many funds are also serving up superior performance, and now the firm has three-year track records on many funds, which is making selling them much easier.

The table below clearly shows how First Trust’s growth is accelerating:


But consider these facts for a bit of extra context: That accelerating growth has lifted First Trust on the ETF industry league table to the No. 6 spot—up from No. 9 at the end of 2013 and No. 11 at the end of 2012. And the firm is No. 3 in terms of year-to-date asset gathering, suggesting this growth is likely to continue.


Impressive Asset Haul

But I’m getting ahead of myself.

For the record, the ETF that gained instant credibility this week was the First Trust Enhanced Short Maturity Fund (FTSM). It’s what’s called a money-market proxy fund—not unlike the PIMCO Enhanced Short Maturity Strategy Fund (MINT | B), the biggest actively managed U.S-listed ETF.

Interestingly, MINT lost about $270 million, or 7 percent of its assets, on the same day that First Trust’s FTSM gained $499 million. The inflows into FTSM appear to have been one big trade, and you wonder if one investor switched from one fund to the other.

But at the very least, that coincidence plays into the point I’m making.

Active Fund Success

We spill a fair amount of ink here saying that active ETFs so far aren’t getting much traction, and while that’s certainly true in the aggregate, that’s not so true in the case of First Trust, especially in the past year. Consider the following.

Looking across the whole industry, 114 of the 1,650 ETFs on the U.S. market ETFs are actively managed, for 7 percent of the total. But less than 1 percent of the $1.9 trillion in total assets are in active ETFs. There’s a disconnect there between what fund sponsors are selling and what investors are buying. Not so much with First Trust.

Twelve of First Trust’s 91 ETFs are actively managed—about 13 percent of its fund lineup. Assets in those 12 funds amount to nearly $2.2 billion—about 13 percent of First Trust’s more than $29 billion in total assets under management.

Part of its success is innovative strategies, such as the First Trust North American Energy Infrastructure Fund (EMLP). It was the ETF market’s first actively managed fund targeting master limited partnerships and the first such security registered under the Investment Company Act of 1940. Apart from the flexibility that active management can afford, that holders can avoid “K-1” tax forms associated with futures-based investing. The ETF’s $927 million in assets speak for itself.

While two-thirds of First Trust’s active ETF assets are in EMLP and FTSM, there’s evidence that investors are responding to strong performance. EMLP, for example, has readily beaten the performance of the market’s biggest MLP fund, the Alerian MLP ETF (AMLP), in the past year.



Enhanced Beta And Plain Beta

First Trust is also on the cutting edge of the active-versus-passive debate in the money management industry. The whole discussion has become clouded by “enhanced beta” indexing in the past few years, and First Trust’s “AlphaDex” lineup of such funds is right there to exploit investor appetite for a quasi-active approach to beating major market indexes.

First Trust’s 46 AlphaDex funds that screen securities for a number of factors make up about half of the firm’s ETFs, and total assets in those funds are at nearly $17 billion, almost 59 percent of its assets. With the amount of assets flowing into enhanced beta twice that of the entire industry, it’s clear First Trust is well positioned to take advantage of these growing flows.

Many of those AlphaDex funds are also outperforming their pure-beta rivals, as the 3-percentage-point lead the First Trust Health Care AlphaDEX ETF (FXH | B-65) is enjoying over the Healthcare Select Sector SPDR Fund (XLV | A-93) in the past year shows.


Charts courtesy of StockCharts.com

And for investors who want interesting slices of the fund world through more straightforward indexing methodologies, First Trust is plying its innovative trade there, too.

It’s known for niche strategies such as the $332 million First Trust ISE Cloud Computing ETF (SKYY | B-31), the $509 million First Trust US IPO Fund (FPX | A-47) and the $1.8 billion First Trust Dow Jones Internet Fund (FDN | B-95).

The point of all this is this: There are a lot of noteworthy innovations going on at First Trust. This is a company that has successfully exploited an interesting variety of unfilled pockets of the ETF industry with products worthy of consideration.

Investors and advisors owe it to themselves and their clients to fully understand what the growing buzz around First Trust is all about.

At the time this article was written, the author owned none of the securities mentioned in the article. Contact Olly at [email protected] and follow him on Twitter @OllyLudwig.

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