First Trust: Track Record Our Trump Card

March 30, 2015

First Trust is a company that doesn’t trumpet its success very often, almost to a fault, but it has seen its assets grow nearly fivefold in the past three years. Last year alone, it was the fastest-growing firm outside of the “big 3” (iShares, State Street, Vanguard), which is why we named it ETF Issuer of The Year.


Behind that success is a growing roster of nonvanilla funds focused on outperforming the market, such as the AlphaDex ETFs. But more importantly, it’s the burgeoning—and strengthening—relationships with advisors that are driving First Trust’s impressive growth. It seems that outperformance does sell, but it takes time to sell it.


We caught up with First Trust’s ETF strategists Dan Waldron and Ryan Issakainen at the recent Awards, and they shared what’s working so well for the firm. First Trust had the biggest asset growth of all ETF issuers in 2014, growing some 35 percent in one year. What worked so well last year?


Ryan Issakainen: Three years ago, we finished the year at $6.3 billion in assets in our ETF shop, and at the end of last year, we were at $33 billion. That’s actually almost a fivefold increase in three years. It’s starting to pick up momentum, and that trajectory continues. A lot of people didn’t notice when we went from $6 billion to $8 billion, and then from $8 billion to $19 billion, but then $19 billion to $34 billion was more noticeable. Would you say that track record is behind that momentum, or is it because the lineup of products has grown significantly?


Waldron: Products don’t sell. It’s relationships that we’re building in this marketplace with the advisor community that’s starting to build momentum. As you know, relationships take time with financial advisors. First Trust is a more niche ETF issuer, offering more alternative takes on different segments than plain-vanilla ones. How are advisors using your funds?


Waldron: I’d say we’re doing something different from the traditional benchmark-centric approach where you’re just replicating the S&P 500. Financial advisors in some ways use our funds the same way they use mutual funds, but as a replacement—traditional, actively managed, open-end mutual funds that have underperformed for years and years. I don’t know that it’s all that surprising, but that’s what we want. These types of ETFs aren’t usually cheap, so is the conclusion to be drawn here—given your success—that investors are willing to pay for performance?


Waldron: If you sat down with 1,000 advisors, I would think that probably 90 percent of them believe in active management. This whole ETF phenomenon was built on the back of passive management, but we believe that, going forward, the main driver for investment flows is going to come from products that can compete on a risk-adjusted basis for performance.


We’re really in a sweet spot to the extent that we can offer advisors the benefits of active management but in the ETF wrapper. We’re getting money from advisors who are moving out of the SPDR S&P 500 ETF (SPY | A-98) and the iShares Core S&P 500 ETF (IVV | A-98) and over to First Trust Large Cap Core AlphaDex ETF (FEX | B-80). We’re attracting money from advisors that are managing separate accounts in mutual funds.


Out of our 94 funds, there are only four that are traditional beta products that own every stock in the market, weighted based on market cap. Otherwise, they’re all some type of alternative selection process. The AlphaDex suite of products comes to mind here.


Waldron: The 41 AlphaDEX funds are dramatically different from traditional beta products, and that’s what’s really getting the attention of the financial advisor. They want outperformance, and they’re looking for it in a low-cost, transparent, tax-efficient vehicle.


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