First Trust Plans Ag AlphaDex ETF

April 25, 2012


First Trust, the Wheaton, Ill.-based firm that sponsors a popular Internet-linked ETF (NYSEArca: FDN), filed paperwork with U.S. regulators to market an agriculture-focused equities ETF that’s built around its alpha-seeking AlphaDex indexing methodology.

The registration statement for the First Trust Global Agriculture AlphaDex ETF comes just two months after the company filed similar paperwork to market a broader commodities fund that would also tap into agriculture-linked securities, but that would also include exposure to precious metals, base metals and energy stocks.

First Trust already sponsors more than two dozen AlphaDex funds that serve up everything from country-specific portfolios to size and style strategies to sector ETFs, the first of which was rolled out back in 2007. But the company has yet to venture into the commodities space.

The new agriculture ETF will track a NYSE Euronext index from its StrataQuant Index Series, which is a fundamentally weighted benchmark that picks agriculture stocks of companies involved in the sector globally, and that may generate positive alpha relative to traditional passive indexes.

First Trust’s agriculture fund would join a growing roster of equities-based ETFs that tap into the space, such as the $5.76 billion Market Vectors Agribusiness (NYSEArca: MOO), the PowerShares Global Agriculture Portfolio (NasdaqGM: PAGG) and the iShares MSCI Global Agriculture Producers (NYSEArca: VEGI).

But First Trust AlphaDex methodology adds a quasi-active element that the competing funds, which are purely beta strategies, don’t have.

Overall, the segment has performed largely in line with the broader stock market as measured by the S&P 500 Index. MOO and PAGG have both climbed 10.8 percent year-to-date. The $5 million VEGI has slid 0.72 percent since its Jan. 31 launch, as it missed out on rallying stocks in the first month of the year.

Even though the newcomer seems to serve up very similar country exposure and carry similar weightings to top holdings such as Monsanto and Potash Corp. as its more established counterparts do, VEGI has the biggest portfolio, with 168 securities compared with MOO’s 49 holdings and PAGG’s 47.

The Inner Workings

First Trust’s AlphaDex methodology seeks to generate extra returns relative to conventional beta market capitalization-weighted indexes by employing an active security selection process that hones in on alpha-producing stocks.

To be included in the mix, companies need to meet minimum liquidity requirements as well as have a market capitalization of at least $1 billion. Still, companies smaller than that will be included if the eligible universe of stock falls below the 47 the fund hopes to hold, the filing said.

The selected securities are then ranked on growth and value factors such as price appreciation over a certain period; sales growth, book value in relation to price; and return on assets, to name a few. Only those ranking within the top 75 percent of all stocks in the group will make it into the fund.

Finally, the portfolio is split into quintiles, with the top-ranked securities representing a third of the mix, followed by four other smaller groups based on rankings. Stocks are equally weighted within each quintile.

The filing, which says the fund will replicate as fully as possible its benchmark, leaves the door open to the use of derivatives instruments in the portfolio if First Trust deems it fit.

First Trust didn’t disclose tickers or fees.


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