FTXN: Outperforming Its Industry Benchmark

The First Trust Nasdaq Oil & Gas ETF (FTXN), incepted in 2016, selects and weights its 41 holdings based on momentum and fundamental factors, outperforming the SPDR® S&P Oil & Gas Exploration & Production ETF (XOP) since inception with lower risk. However, FTXN has underperformed the broader energy sector benchmark (XLE) due to XLE's superior return, cheaper expense ratio, lower volatility and higher liquidity, suggesting FTXN may be better suited for tactical allocation strategies rather than long-term investment.

Analysis

The First Trust Nasdaq Oil & Gas ETF (FTXN), launched on September 20, 2016, employs a strategy tracking the Nasdaq US Smart Oil & Gas™ Index, which selects 30 to 50 U.S. oil and gas stocks based on return on assets, gross income, and momentum, then weights them by trailing 12-month cash flow. FTXN's portfolio currently comprises 41 stocks, exhibits a 30-day SEC yield of 3.04%, and carries an expense ratio of 0.60%. The portfolio is notably concentrated, with the top ten holdings constituting 58% of asset value and each of the five largest positions exceeding 7%. It is primarily invested in U.S. mid-cap companies (approximately 53% of assets), with crude oil producers representing 50% of the portfolio. Compared to the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), FTXN is slightly more expensive on valuation ratios but shows superior aggregate growth rates, albeit with marginally lower earnings growth. Since October 1, 2016, FTXN has outperformed XOP by 6.4 percentage points in annualized return, achieving this with significantly lower maximum drawdown and volatility; over the last 12 months, FTXN is 3.8 percentage points ahead of XOP, also with a shallower drawdown. However, while FTXN has outperformed other strategy-based energy ETFs like FXN and PXI since October 2016, it has underperformed the capital-weighted sector benchmark, The Energy Select Sector SPDR Fund ETF (XLE). XLE has demonstrated not only better returns but also boasts a cheaper expense ratio, lower volatility, and higher liquidity than FTXN. This performance differential suggests FTXN's specific factor-based strategy, despite outperforming its direct smart-beta industry peer XOP, may not be as compelling for broad, long-term energy sector exposure compared to simpler, market-cap weighted benchmarks.

Key Decisions for Investors

• Investors seeking long-term core exposure to the oil and gas sector might find the broader, lower-cost, and historically better-performing XLE a more suitable option than FTXN, given XLE's superior risk-adjusted returns and liquidity.
• FTXN could be considered for tactical allocation within a diversified portfolio, particularly by investors aiming to leverage its specific momentum and fundamental screening methodology in the U.S. oil and gas space, recognizing its historical outperformance against XOP.
• The significant concentration risk in FTXN, with 58% of assets in the top 10 holdings, necessitates careful due diligence and position sizing to manage potential idiosyncratic risks associated with its largest constituents.