Non-Tech, Clean-Tech

February 18, 2007

First Trust expands its ETF line-up, leveraging the Nasdaq's growing indexing efforts.

First Trust Advisor., the Lisle, Illinois-based advisory with the quirky ETF lineup, just added two to its ever-expanding cadre: the Nasdaq-100 Ex-Tech (Nasdaq: QQXT) and Nasdaq Clean Edge U.S. Liquid Series (Nasdaq: QCLN) ETFs.

With 12 ETFs ranging from dividends to tech currently in its stable, First Trust plans on listing another 20 to 25 this year alone. The advisory, which manages some $28 billion in assets of for-profit businesses and not-for-profit organizations, has big ambitions for its fledgling ETF business, which, at the end of January, held just $613 million of the $422 billion invested in U.S. ETFs.  

QQXT and QCLN both listed on the NASDAQ on February 15, 2007. With expense ratios of 60 basis points, both - as their names imply, track NASDAQ indexes (NDXX and CELS, respectively). Where the Ex-Tech fund holds 58 Nasdaq-only companies, however, the Clean Edge is broader, harvesting 46 publicly traded U.S.-companies, regardless of exchange. So far, both ETFs have been trading quietly, without attracting much volume or assets.


Nasdaq's Ex-Tech ETF offers a third take on one of the most popular ETFs worldwide: QQQQ, which tracks the Nasdaq-100 index and holds the 100 largest domestic and international non-financial companies listed on that exchange. QQXT is an equal-weighted version of QQQQ, minus the Nasdaq-100's 42 tech stocks.

"We're describing the ETF by what it is not, which is an unusual way to define a product," says First Trust's vice president Dan Waldron.

Yet it works, giving immediate name recognition to a new ETF with roots in a well-known index, and complimenting the suite of Nasdaq-100 ETFs already in play. With a price-to-earnings ratio of nearly 45, this ETF is not for the faint of heart. Its top holding, C.H. Robinson Worldwide Inc. (CHRW), is about as volatile as Google, and two times as volatile as the S&P 500.  Its second largest holding, Wynn Resorts Ltd. (WYNN), is nearly two times as volatile as Google and four times as volatile as the S&P 500.  Its largest sectors are consumer services, clocking in at 40.2 percent; healthcare, at 24.9 percent; and industrials, at 17.7 percent. (For the top ten holdings, see chart below.) 


Earlier this year (see story), Nasdaq and First Trust teamed up to list the Nasdaq-100 Technology ETF (Nasdaq: QTEC), which is an equal-weighted version the same stocks excluded from the non-tech fund, and the Nasdaq-100 Equal Weight ETF (Nasdaq: QQEW), which is an equal-weighted version of all the stocks in QQQQ. All four indexes are reconstituted yearly and rebalanced quarterly.

Clean Tech

The Clean Edge ETF tracks a modified cap-weighted index (which means larger companies are weightier) developed by the eponymous research and publishing firm with offices in Oakland and Portland, Oregon. It holds pure-play "clean edge" companies in the biofuel, wind power, solar power, and fuel cell industries.


It price-to-earnings ratio is 38, lower than the non-tech fund; still, however, it's not exactly a "widows and orphans" fund. Its largest holding, representing 10 percent of the index, is MEMC Electronic Materials Inc. (WFR), which is nearly five times as volatile as the S&P 500 and 2.5 times as volatile as Google. Information Tech is the biggest sector, clocking in at 51 percent, while Industrials and Energy make up 34 percent and 6 percent of the index, respectively. It is reconstituted twice a year in March and September and rebalanced quarterly. (For the top ten holdings, see chart below.) 

According to Clean Edge research, each of the four industries is positioned for spectacular growth in the coming decade, collectively projecting an increase in assets from $40 billion in 2005 to $167 billion in 2015. With this kind of growth in sight, venture capital, including private funds, multinationals, and governments, has been steadily stepping up investments to this niche corner of the market, says Ron Pernick, a Clean Edge principal. Last year, more than 9 percent of the $26 billion in venture capital investments in the U.S. flowed into energy technology.

There are currently two other ETFs covering facets of the alternative energy market, both from PowerShares. The WilderHill Clean Energy ETF (AMEX: PBW) was first to market, in 2005, and has accumulated some $780 million in assets.

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