ETF Pulse Check First Trust Health Care AlphaDEX Fund

The First Trust Health Care AlphaDEX Fund (FXH) is an exchange-traded fund with a quant-driven focus on large- and mid-cap U.S. healthcare companies, aiming for excess returns through a smart beta approach. By tiered, equal-weighting stocks based on growth and value factors, FXH offers significant mid-cap exposure and reduces reliance on large-cap pharmaceutical names prevalent in other healthcare ETFs. It strategically underweights pharmaceuticals while emphasizing biotechnology and healthcare providers, making it particularly relevant in the current health sector landscape. The fund is reconstituted and rebalanced quarterly, providing investors with a dynamic exposure to the healthcare sector's evolving opportunities and challenges.

Basic Information

The First Trust Health Care AlphaDEX Fund, identified by its ticker FXH, was launched on May 8, 2007, by First Trust Advisors L.P. The fund carries an expense ratio of 0.60%, which is relatively higher compared to industry peers, potentially impacting net returns for investors. FXH's top holdings include Elanco Animal Health, Tenet Healthcare, and Exelixis, with weights of 3.14%, 2.85%, and 2.69% respectively among the top 15 holdings. Health care commands the largest sector exposure at 35.04%. Despite the fund's strategic weighting, it has seen net flow ratios of -0.10% over both 7-day and 30-day periods, signaling limited inflows. The average returns over 6M, 1Y, and 3Y are -0.54%, 1.75%, and -3.04%, respectively, with volatility ranging from 3.96% to 6.86% across these periods. The maximum drawdown over 1Y and 3Y notably exceeds 0.99%, underscoring the fund's exposure to sector-specific risks.

News Summary

Recent developments in the health sector highlight several themes pertinent to FXH. Key headlines emphasize potential financial challenges due to proposed Medicaid cuts, which threaten access to healthcare services and could impact healthcare providers integrated into FXH's portfolio. Additionally, geopolitical tensions, such as trade disputes between China and the EU, could affect healthcare supply chains, particularly for firms involved in medical device manufacturing. The Trump administration's healthcare policies, including the reduction of Medicaid funding, might further squeeze providers reliant on government programs, a factor directly influencing FXH's holdings. Meanwhile, advancements in biotechnology and digital health technologies, such as AI-driven diagnostics, continue to evolve, offering both opportunities and risks for healthcare investments. These sector-specific and macroeconomic factors provide a complex backdrop for FXH's performance outlook.

Analyst Rating: Strong Sell

The First Trust Health Care AlphaDEX Fund (FXH) is currently rated as a Strong Sell. This assessment is driven by several factors: a high expense ratio of 0.60% compared to more competitively priced alternatives, consistent negative net flows over recent periods, and underwhelming return performance over 6M, 1Y, and 3Y periods. Although volatility remains contained, the fund's significant drawdowns and sector concentration pose substantial risks. The healthcare sector's exposure to regulatory changes and macroeconomic shifts further exacerbates these concerns, suggesting limited upside potential for investors. As a result, despite some stabilizing elements, the overall risk and cost structure warrant cautious consideration and a Strong Sell recommendation.

Backtest Scenario

The backtest scenario for the First Trust Health Care AlphaDEX Fund (FXH) during the 2017 Medicaid cuts reveals critical insights into sector parallels. During this period, healthcare providers faced financial pressures from stricter Medicaid work requirements and reduced funding, impacting their revenue and margins. FXH, tracking the Nasdaq-100 Health Care Providers Sub-Industry Index, would have been directly affected by these sector-specific challenges. Similar stressors, particularly affecting rural hospitals reliant on Medicaid, highlight the vulnerability of FXH's performance to changes in healthcare policy. Investors should be mindful of these historical parallels when evaluating FXH's potential resilience against future healthcare policy shifts.

Risk Outlook

FXH faces several forward-looking risks, primarily stemming from its healthcare sector concentration and potential macroeconomic disruptions. The fund's exposure to healthcare policy changes, such as those affecting Medicaid and the Affordable Care Act, could directly impact its holdings. Geopolitical tensions, particularly between China and the EU, risk supply chain disruptions for medical device firms within FXH's portfolio. While liquidity risks appear stable, the fund's volatility and significant drawdown potential highlight the need for vigilant monitoring. Sector-wide shifts or company-specific performance issues could pose further challenges, necessitating a careful approach to FXH's risk management in the healthcare investment landscape.

Conclusion

FXH's investment case is characterized by its strategic healthcare exposure, offering a smart beta approach with notable mid-cap emphasis. However, given its high expense ratio, limited capital inflows, and sector-specific risks, FXH may be better suited for aggressive investors willing to navigate healthcare volatility. Moving forward, monitoring policy changes and macroeconomic developments will be crucial in assessing FXH's performance and viability within the healthcare sector.