First Trust Plans European Launch

US ETF issuer First Trust says it plans to launch a new family of European exchange-traded funds in the first quarter of 2013, subject to regulatory approval in Ireland.

First Trust issued its first US ETFs in 2005 and is currently the eleventh-largest US issuer, with $9.3 billion in funds under management.

Around half this total is in a family of “enhanced” index trackers called AlphaDEX ETFs, and First Trust plans to start its European operations with the launch of up to five AlphaDEX funds.

The funds for which First Trust has applied for regulatory approval in Ireland are the First Trust US Large Cap Core AlphaDEX, Emerging Markets AlphaDEX, Eurozone AlphaDEX, United Kingdom AlphaDEX and Global Dividend AlphaDEX UCITS ETFs.

The AlphaDEX index methodology takes stocks from a “base” index and divides them into growth, core and value buckets. The growth stocks are evaluated by five metrics and given a score:

  • three-, six- and 12-month price appreciation (i.e., momentum)
  • one-year sales growth
  • sales-to-price ratio.

The value stocks are evaluated by three metrics and given a score:

  • book value-to-price
  • cash flow-to-price
  • return-on-assets.

The core stocks are evaluated on both metrics and the higher of the two scores is taken.First Trust then looks at all the scores and assigns the highest weight in each AlphaDEX to the highest scoring stocks. The goal is to create an index that emphasizes the “best” growth stocks and “best” value stocks. All the indices follow a modified equal-weighting methodology.

While the intellectual property underlying the AlphaDEX indices belongs to First Trust, the administration and calculation of the indices is outsourced to S&P Dow Jones.

First Trust’s US-listed AlphaDEX ETFs charge between 70-85 basis points a year in expenses, among the highest management fees in the market. The European funds are expected to hit the market with annual fees of around 85 basis points.

The ETF manager says that these above-average fees are justified by the expected long-term outperformance of the AlphaDEX methodology.

“We’re targeting the middle ground between conventional, market-cap beta index exposure and actively managed mutual funds, which typically charge 125-150 basis points,” Eric Anderson, vice-president at First Trust, told IndexUniverse.eu.

First Trust is teaming up in Europe with LGBR Capital, a London-based firm that will help distribute the ETFs.

Bank of New York Mellon will be the custodian for First Trust’s European ETF range. The funds will not engage in securities lending.

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