First Trust Global Portfolios has made its debut on the Deutsche Börse with the launch of the First Trust Germany AlphaDEX UCITS ETF (FTGG GY).
The First Trust Germany AlphaDEX UCITS ETF provides exposure to 40 German stocks with strong fundamentals. (Photo © Jared Preston)
The fund follows a “smart beta” methodology based on company fundamentals to objectively select German stocks which may generate positive alpha relative to traditional indices, such as the DAX.
The ETF is linked to the Nasdaq AlphaDEX Germany Index, an index built on the patented, rules-based AlphaDEX methodology (see below). The methodology is designed to use fundamental growth and valuation factors to seek better risk-adjusted excess returns relative to traditional passive cap-weighted benchmarks.
“We are delighted to launch the First Trust Germany AlphaDEX UCITS ETF,” said Derek Fulton, CEO of First Trust Global Portfolios. “With this launch, our first listing on the Deutsche Börse, we are bringing our proven AlphaDEX merit-based stock selection methodology to Europe’s largest economy.”
The fund has 40 holdings including significant weights in many well-known German names such as BMW, Munich Re and Daimler. However, it is lesser known firms such Deutsche Wohnen, Sartorius, Fresenius, KUKA and Kion Group that take the top spots owing to their superior fundamentals based on metrics such as price to earnings and price to cashflow.
Over time it is expected that these superior fundamentals will deliver alpha relative to traditional benchmarks.
First Trust said in a statement that it believes that, while different methods of indexing will have inherent limitations at different times, fundamental indices have the potential to generate higher long-term returns, and often times reduce volatility, compared to similar cap-weighted indices.
With the addition of the fund, First Trust now offers a total of seven AlphaDEX UCITS ETFs – four single country funds (UK, Japan, US and now Germany) and three broad/regional funds (emerging markets, eurozone and global).
First Trust Global Portfolios is the European London-based affiliate of Illinois-headquarted First Trust, a leading US provider of ETFs, which has some $100 billion in assets under management, including around $30 billion in ETFs.
The ETF has a total expense ratio of 0.65%, rising to 0.75% in November.
The index methodology
The index is constructed by ranking the eligible stocks from the Nasdaq Germany Index, the parent index, on growth factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets.
All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style. Each stock receives the best style rank from the previous step as its selection score.
The top 40 stocks based on the selection score determined in the previous step comprise the “selected stocks”. The selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index. The stocks are equally-weighted within each quintile.
Each stock is then tested in order of its selection score rank to check if the weight assigned to that stock is outside the sector weighting constraints, which are set at 15% above the benchmark weight. If the weight assigned to the stock, when added with the weight assigned to all higher ranking stocks in its sector, is greater than the constraint, then the stock’s weight is lowered to the highest rank in the next quintile. Stocks previously lower in rank then move up one rank. Such stocks in the lowest quintile that violate a constraint are removed from the portfolio and replaced by the highest scoring stock not originally selected, subject to sector constraints. This process continues until all the sector weightings meet the constraint.
The index is reconstituted and rebalanced semi-annually.