Skip to main content

AlphaDEX ETFs - performing as promised?

I mentioned last week that I was seeing a group of AlphaDEX ETFs on the TradeRadar Trend Leaders list. I was not at all familiar with the name but since they were performing so well I felt they deserved a look. It turns out they are managed by First Trust and they are intended to provide superior performance by taking fundamentals into account when selecting the stocks that make up each style or sector portfolio.

Index Universe first wrote about these ETFs way back in 2007 (here's the link from Seeking Alpha).

Here's how Index Universe described the mechanics:
The methodology for enhancing those indexes is transparent, but complicated. The stocks in each index are divided 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.

So the questions is, has First Trust succeeded in doing better than a standard cap-weighted index fund?

I took a selection of AlphaDEX funds (the ones that appeared on the Trend Leaders list this past weekend) and compared them with the corresponding SPDR ETFs managed by State Street Global Advisors.

Among the ones we looked at, it does appear that many of the AlphaDEX ETFs do indeed provide superior performance. The following charts show the gains since the March low for each of the ETFs with the AlphaDEX ETFs in blue and the SPDR ETFs in red. Click on any chart to view a larger image.

compared to SPDR Dow Jones Large Cap Value ETF (ELV)

compared to SPDR Dow Jones Small Cap ETF (DSC)

compared to Materials Select Sector SPDR (XLB)

compared to Consumer Staples Select Sector SPDR (XLP)

compared to Consumer Discretionary Select Sector SPDR (XLY)

compared to Industrial Select Sector SPDR (XLI)

compared to Energy Select Sector SPDR (XLE)

compared to Financial Select Sector SPDR (XLF)

Conclusion --

Some of these ETFs do provide quite a margin of superior performance compared to the Select Sector SPDR ETFs and then some of them are pretty much just equivalent to the SPDRs. Judging by this sample then, it would appear that you can't really go wrong with the AlphaDEX family of ETFs in terms of returns though expenses tend to be higher than the SPDRs and volume is quite a bit lower.

The methodology does seem to add value when the stocks in the particular sector are showing the characteristics that their algorithm emphasizes. At the moment that seems to be consumer discretionary, consumer staples, materials and large-cap value. The benefit is less clear in the small cap, industrials, energy and financial sectors.

Overall, however, the AlphaDEX ETFs are worth consideration.

For more info on these ETFs: visit the First Trust site


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here: Contact us if you have questions or identify any new issues.

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve