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2 Sector ETFs Drawing Renewed Attention

December 1, 2016 11:45 am
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Sector exchange-traded funds are increasingly important parts of investors' portfolios, and that sentiment includes both professional and retail investors. These ETFs can help investors steer clear of a familiar dilemma that confounds legions of investors: identifying the right stock in the right sector at the right time.

So Much More Than Timing

Many of the most popular sector ETFs on the market today are cap-weighted funds, but there are some credible smart beta alternatives, including First Trust's series of AlphaDEX sector ETFs. That group includes the First Trust Consumer Stapl Alpha Fd (ETF) (NYSE: FXG) and the First Trust Ind/Prod AlphaDEX Fd (ETF) (NYSE: FXR).

The AlphaDEX methodology includes ranking members of various Russell 1000 sectors on growth factors including three-, six- 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, as First Trust noted on the AlphaDEX funds' websites.

Recent AlphaDEX Performance

Likely the handiwork of ETF strategists or other institutional-type investors, cash has recently been pouring into FXR and FXG.

“This week we have seen what looks like a sector rotation trade involving two First Trust sector funds, where more than $700 million entered FXR (Industrials/Producer Durables AlphaDEX) and the same dollar amount exited FXG (Consumer Staples AlphaDEX). Trading volume in each of the funds topped 20 million shares apiece on Monday of this week, which are huge multiples of the typical daily volumes in each product,” said Street One Financial Vice President Paul Weisbruch in a recent note.

More About FXG

The $1.3 billion FXG is a departure from cap-weighted staples ETFs in that the First Trust offering's 42 holdings have a median market value of $15.2 billion, putting the ETF in mid-cap territory. In other words, this is not the ETF for investors looking for a staples ETF dominated by the likes of Procter & Gamble Co (NYSE: PG) or The Coca-Cola Co (NYSE: KO).

While those two stocks may be staples of standard staples ETFs, they combine for just over 2.3 percent of FXG's weight.

More About FXR

A similar scenario is seen with FXR. That ETF, also home to $1.3 billion in assets, is not dominated by the most familiar industrial stocks. In fact, FXR is, arguably, a quasi-airline ETF as airline stocks represent seven of the ETF's top 10 holdings. While FXR has some perks in certain environments, it has lagged the S&P 500 Industrial Index by about 150 basis points since inception.

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