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ETF Showdown: Materials Melee


Here's a guide to the materials sector ETFs out in the market.

The First Trust Materials AlphaDEX Fund, which is just over five-years-old compared to almost 14-years-old for XLB, does things differently. Home to 57 stocks, FXZ devotes no more than 3.2% of its weight to any single holding. FXZ has duplicate holdings with XLB such as DuPont, Dow and Freeport. However, the AlphaDEX selection methodology ensures FXZ is much different than XLB.

The AlphaDEX methodology is not active management per se, but it does employ quality screens on potential constituents for ETFs such as FXZ. FXZ tracks the NYSE Euronext constructs the StrataQuant Materials Index, which uses the AlphaDEX methodology. That ranks Russell 1000 members on metrics such as three, six and 12-month price appreciation, cash flow, book value, return on assets and others.

The stocks are scored and ranked with the bottom 25% being tossed aside and the "selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index," according to First Trust.

That is how FXZ is put together. Not surprisingly, this way of constructing an ETF is pricy compared to the usual cap-weighted methodology. FXZ has annual fees of 0.7% compared to just 0.18% for XLB. FXZ is also slightly more volatile than XLB.

This is a reward for the elevated volatility and higher fees: Over the past quarter, year and year-to-date FXZ has outperformed XLB by health margins, proving the AlphaDEX methodology is worth considering.

Editor's Note: This content was originally published on by The ETF Professor.

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No positions in stocks mentioned.

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