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

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Launched on 05/08/2007, the First Trust Materials AlphaDEX ETF (FXZ) is a smart beta exchange traded fund offering broad exposure to the Materials ETFs category of the market.

What Are Smart Beta ETFs?

Products that are based on market cap weighted indexes, which are strategies designed to reflect a specific market segment or the market as a whole, have traditionally dominated the ETF industry.

Market cap weighted indexes work great for investors who believe in market efficiency. They provide a low-cost, convenient and transparent way of replicating market returns.

On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.

Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.

Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.

Fund Sponsor & Index

FXZ is managed by First Trust Advisors, and this fund has amassed over $319.97 million, which makes it one of the average sized ETFs in the Materials ETFs. FXZ, before fees and expenses, seeks to match the performance of the StrataQuant Materials Index.

The StrataQuant Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.

Cost & Other Expenses

Investors should also pay attention to an ETF's expense ratio. Lower cost products will produce better results than those with a higher cost, assuming all other metrics remain the same.

Operating expenses on an annual basis are 0.62% for FXZ, making it on par with most peer products in the space.

It's 12-month trailing dividend yield comes in at 1.58%.

Sector Exposure and Top Holdings

Most ETFs are very transparent products, and disclose their holdings on a daily basis. ETFs also offer diversified exposure, which minimizes single stock risk, though it's still important for investors to research a fund's holdings.

Representing 92.30% of the portfolio, the fund has heaviest allocation to the Materials sector.

When you look at individual holdings, United States Steel Corporation (X) accounts for about 5.32% of the fund's total assets, followed by Steel Dynamics, Inc. (STLD) and Reliance Inc. (RS).

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