Is First Trust Materials AlphaDEX ETF (FXZ) a Strong ETF Right Now?

The First Trust Materials AlphaDEX ETF (FXZ), a $216.46 million smart beta fund, targets the Materials sector (83.7% allocation) using an AlphaDEX screening methodology to generate alpha. With a 0.61% expense ratio and medium risk profile (beta 1.15), FXZ has returned 9.99% YTD but lost 6.27% over the past year. While it offers concentrated exposure, its higher expense ratio and smaller asset base contrast with larger, lower-cost alternatives like GUNR and XLB in the Materials ETF space.

Analysis

The First Trust Materials AlphaDEX ETF (FXZ) is a smart beta fund with $216.46 million in assets, utilizing a proprietary AlphaDEX screening methodology to select stocks from the Russell 1000 Index with the goal of generating alpha. Its performance is mixed, showing a 9.99% gain year-to-date but a 6.27% loss over the past year. The fund's risk profile is characterized as medium, with a beta of 1.15 indicating higher volatility than the broader market and a standard deviation of 22.60%. The portfolio is relatively concentrated with only 38 holdings, where the top 10 positions account for 46.87% of total assets. A key consideration is its 0.61% expense ratio, which is significantly higher than larger, market-cap weighted alternatives like the Materials Select Sector SPDR ETF (XLB) at 0.08%, which may present a material drag on net returns. While FXZ offers a targeted strategy, its modest asset base and higher costs position it as a distinct alternative to more established, lower-cost passive funds in the materials sector.

Key Decisions for Investors

• Investors should weigh FXZ's active alpha-seeking strategy and recent year-to-date gains against its higher 0.61% expense ratio and negative one-year performance, especially when compared to significantly cheaper and larger alternatives like XLB.
• Given its beta of 1.15 and concentrated portfolio of 38 stocks, this ETF is more suitable for investors with a higher risk tolerance who are specifically seeking tactical, non-market-cap weighted exposure to the materials sector.
• Monitor the performance of top holdings such as Anglogold Ashanti and Newmont, as their significant weightings will be a primary driver of the fund's returns and a key factor in validating the AlphaDEX selection model's effectiveness.