FDL: The Portfolio Rebalance Is Hurting Performance; Consider Alternatives

The First Trust Morningstar Dividend Leaders Index Fund ETF (FDL) is significantly underperforming the S&P 500 following its recent portfolio rebalance, which increased its concentration in the struggling energy and healthcare sectors. Energy holdings like Exxon and Chevron face substantial revenue and earnings declines due to low oil prices, with the sector expecting a 10% earnings drop in 2025, while healthcare top holdings have seen significant share price losses amid policy concerns. This sector-specific headwind, coupled with a 'sell' quant rating and elevated risk, suggests continued underperformance, leading to a downgrade to 'hold' and a recommendation for alternatives like FDVV or CGDV with more diversified or better-performing sector exposures.

Analysis

The First Trust Morningstar Dividend Leaders Index Fund (FDL) is exhibiting significant underperformance relative to the S&P 500, a direct consequence of its recent portfolio rebalance that increased concentration in the energy and healthcare sectors. The fund's energy allocation, now almost a quarter of its portfolio, is heavily weighted in Exxon (XOM) and Chevron (CVX), both of which reported revenue declines exceeding 10% due to low crude prices. The energy sector as a whole saw earnings fall over 20% in Q2 2025 as oil prices dropped 21% year-over-year to $63.68 per barrel, with a further 10% sector-wide earnings decline projected for the full year. Simultaneously, FDL's key healthcare holdings, including Pfizer (PFE), Merck (MRK), and Bristol-Myers Squibb (BMY), have suffered substantial share price losses of 10% to 20% year-to-date amid policy concerns over drug pricing. While some holdings in financials and communications, such as Verizon (VZ), provide modest support, they are insufficient to offset the headwinds. This poor positioning is corroborated by a 'Sell' quant rating (score: 2.14) and elevated risk metrics, including higher-than-median volatility and a heavy 55% concentration in its top 10 holdings. Although the fund offers a 4% dividend yield, the sluggish earnings growth in its core sectors casts doubt on the sustainability of its 11% average dividend growth rate.

Key Decisions for Investors

• Given the fund's significant underperformance driven by fundamental weaknesses in its core energy and healthcare holdings, investors should consider reducing exposure to FDL.
• Evaluate alternative dividend-focused ETFs such as the Fidelity High Dividend ETF (FDVV) or the Capital Group Dividend Value ETF (CGDV), which have demonstrated outperformance through more favorable sector allocations in technology and financials.
• Monitor crude oil prices and pharmaceutical policy developments closely, as these are the primary drivers of FDL's negative performance and are critical catalysts for any potential turnaround.
• Be aware that the fund's high concentration risk, with 55% of assets in its top 10 holdings, makes it particularly vulnerable to continued downturns in the energy and healthcare sectors.