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Rating:First Trust Sees Future of ETFs in Alpha Not Rated 2.3 Email Routing List Email & Route  Print Print
Tuesday, July 11, 2006

First Trust Sees Future of ETFs in Alpha

Reported by Marie Glancy

First Trust Advisors has set itself a goal of 15 new ETFs by yearend, and gradually it's getting there: Tuesday's debut of the First Trust DB Strategic Value Index Fund on the American Stock Exchange marked their eighth. Dan Waldron, vice president, ETF product development for the Lisle, Illinois-based company, predicts ETFs' future holds a move away from cap-weighted indices, and says the upcoming new products will uphold the firm's focus on "next generation," alpha-generating products.

"DB" stands for Deutsche Bank, reflecting that the fund seeks to match the price and yield (before fees and expenses) of the Deutsche Bank CROCI US+ Index. That index looks at cash return capital invested, or -- to put it more specifically -- tracks the 40 stocks with the lowest price-earnings ratios out of the larger half, plus one (or 251), of S&P 500 stocks.

CROCI figures have been published for several years, said Waldron, but an actual index was created only in 2004. Backtested data shows the CROCI's value-based approach has delivered compound annual returns of 17.5 percent over the past decade, against the S&P 500 Value Index's 9 percent.

"The performance numbers are almost gaudy, they're so good," said Waldron in a media briefing that followed First Trust's bell-ringing.

By following an equal-weighted index like the CROCI, First Trust is aiming to keep risk in check and bet on "the investment merit of the individual stocks" rather than pure size, he said, adding that First Trust appreciates the thinking behind fundamental weighting, too. "Why own the forest when you can own the best trees?"

For now at least, the new ETF is as close as you can get to an actively managed ETF, said Waldron, as it's rebalanced and reconstituted on a monthly basis. He estimates a 100-120 percent stock turnover annually. At 65 basis points, the expense ratio does not fall on the low end for ETFs, but remains moderate in the mutual fund universe.

Waldron said First Trust is excited about the product as an offering in the "core category" of large-cap value, and about the association with Deutsche Bank. "Their reputation ... gives this product the kind of cachet that you want," he said. Christopher Yeagley, director and head of integrated investment solutions at Deutsche Bank, sat in on the briefing, but a representative said the company would not comment on the launch for the time being.  

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