First Trust unveils ETF suite based on Nasdaq US Smart Sector Indices

Sep 21st, 2016 | By | Category: Equities

Exchange-traded fund provider First Trust has launched seven new ETFs tracking Nasdaq US Smart Sector Indices – alternatively-weighted, sector-specific exposures within the US economy. The smart beta funds provide access to the banking, food & beverage, oil & gas, pharmaceuticals, retail, semiconductor, and transportation segments of the US economy, while over-weighting constituents with greater historical exposure to value, low volatility, and momentum characteristics – three proven drivers of return.

First Trust unveils ETF suite based on Nasdaq US Smart Sector Indices

Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented: “These ETFs provide investment advisors with a new set of tools for investing in important industries, while biasing portfolio exposure toward lower valuations, stronger momentum, and less volatility.”

“Nasdaq designed the index family to blend three known and powerful investment factors to create a smarter approach to sector investing,” added Dave Gedeon, Vice President and Head of Research & Development at Nasdaq Global Indices. “The Smart Sector family was built off our focus on delivering outcome-oriented strategies to investors.”

To construct each index, Nasdaq selected the 30 most liquid securities within a specific sector (50 constituents were chosen for each of the retail and the oil & gas sectors). These constituents were then weighted according to their combined z-scores across three factors – volatility (calculated as the trailing one year standard deviation of returns), value (calculated as cash flow to price) and growth (calculated as the average of the 3-month, 6-month, 9-month and 12-month price returns). To promote diversification, a single security cap of 8% is applied and no more than five securities are permitted to reach the cap. In addition, once the initial cap limits have been met, any remaining index securities in excess of 4% are capped at 4%. Each index is reconstituted annually and re-balanced quarterly.

The seven newly-launched funds are listed below:

First Trust Nasdaq Bank ETF (Nasdaq: FTXO)
First Trust Nasdaq Food & Beverage ETF (Nasdaq: FTXG)
First Trust Nasdaq Oil & Gas ETF (Nasdaq: FTXN)
First Trust Nasdaq Pharmaceuticals ETF (Nasdaq: FTXH)
First Trust Nasdaq Retail ETF (Nasdaq: FTXD)
First Trust Nasdaq Semiconductor ETF (Nasdaq: FTXL)
First Trust Nasdaq Transportation ETF (Nasdaq: FTXR)

Each fund has a total expense ratio (TER) of 0.60%.

The funds will broadly compete with US-listed ETFs from providers Invesco PowerShares and iShares.

PowerShares provides an extensive range of industry-specific ‘Dynamic Portfolio’ ETFs covering exposures to the food & beverage, leisure & entertainment, media, retail, biotechnology & genome, pharmaceuticals, energy exploration & production, oil & gas services, building & construction, networking, semiconductors, and software industries. Each ETF tracks an Intellidex index which evaluates potential constituents based on a variety of investment criteria, including: price momentum, earnings momentum, quality, management action, and value. The funds are offered with variable TERs ranging between 0.57% and 0.68%.

Investors may also wish to investigate the iShares Edge MSCI Multifactor ETF series. These nine ETFs offer exposure to the nine ‘Global Industry Classification Standard’ (GICS) sectors – consumer staples, consumer discretionary, healthcare, industrials, financials, materials, technology, energy and utilities. Each ETF tracks an MSCI index that targets exposure to four factors – value, momentum, quality and low size. The funds have TERs of 0.35%.

In Europe there are no ETFs currently available offering smart beta exposure to US sectors. Investors may obtain market cap-weighted exposure to US sectors from ETFs issued by iShares, Source and SPDR ETFs.

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