First Trust New Constructs Core Earnings Leaders ETF (FTCE)
The First Trust New Constructs Core Earnings Leaders ETF (FTCE) is a stock fund holding large and mid-sized U.S. companies chosen for the reliability of their earnings and the strength of their cash flow.
Why earnings quality matters
When a company reports earnings, the headline number can mislead. One firm might have grown profits by selling off assets or cutting costs in ways that hurt future growth. Another might have inflated reported earnings through accounting choices or one-time gains. A third might report strong earnings but fail to convert them into actual cash in the bank.
The fund focuses on companies with genuine, sustainable earnings — profits that flow from real business operations, that are backed by cash, and that have proven repeatable over time. The intuition is simple: a company that consistently converts its sales into real profit is more likely to keep growing and keep rewarding shareholders than a company with one-time windfalls or accounting magic.
The selection process
FTCE uses a proprietary research methodology developed by New Constructs, a financial analysis firm focused on earnings quality, to identify candidates. The process looks beyond headline net income. It digs into cash flow from operations, compares accounting earnings to actual cash, flags suspicious accounting practices, and measures the company’s competitive standing relative to peers.
The fund manager builds a portfolio of roughly 150 to 250 large and mid-cap stocks that pass these screens and meet other criteria: reasonable price relative to earnings and cash flow, stable revenue and customer bases, and a track record of earnings resilience through business cycles. The result is a fairly concentrated portfolio by stock count, but diversified across sectors.
The manager rebalances periodically, removing companies whose earnings quality deteriorates or whose valuations become stretched, and adding new candidates that meet the criteria.
What kind of companies get selected
Because the fund prioritizes earnings quality and cash generation, it tends to hold mature, established companies with proven business models — consumer staples, banks, healthcare providers, industrial companies, and established technology firms. It naturally avoids companies with volatile or unreliable earnings, heavy accounting adjustments, or a history of missing guidance. It also avoids the most expensive growth stocks, where much of the price reflects future earnings that may never materialise.
The portfolio is diversified across U.S. sectors and market capitalizations, though it leans toward companies with market values of USD 5 billion or more — large enough to be stable, but small enough to outpace the mega-cap mega-cap index if execution is strong.
What it costs and how it trades
FTCE has an expense ratio — an annual fee charged as a percentage of assets — that is typical for an actively managed stock ETF, usually in the range of 0.60 to 0.80 per cent per year. That is higher than a passive S&P 500 index fund, which might charge 0.03 to 0.10 per cent, but reflects the cost of active research and portfolio management.
The fund trades on the NASDAQ during regular market hours. You can buy or sell shares instantly at the current bid-ask price, without waiting for a redemption window. There is no income distribution (dividends are rare enough in this portfolio that the fund reinvests them), so the fund’s returns come entirely from capital appreciation as the stock prices of the holdings rise or fall.
The share price fluctuates with the stock market. In up markets the fund tends to rise in line with the S&P 500, or sometimes outperform if the manager’s stock picks beat the market. In down markets the fund falls, though a portfolio of high-quality earnings-driven companies sometimes holds up better than the broad index.
Why earnings quality is an edge
The intuition behind earnings-quality investing is that most stock investors and analysts focus on the headline earnings number and don’t dig deep enough into accounting quality and cash flow. A company with genuine, repeatable, cash-backed earnings deserves a higher valuation than one with reported earnings that owe more to accounting tricks or one-time events. Over time, investors should notice and re-rate the earnings-quality story, supporting the stock price.
Empirical research supports this. Portfolios of high-quality, cash-generative companies have historically outperformed the broad market over long periods, especially in recessions when the companies with real earnings hold up better. However, periods of momentum-driven or speculative market behaviour — when investors chase the fastest-growing or most exciting stories regardless of profit quality — can see quality stocks underperform.
The risks
The biggest risk is that active management does not work. The manager might mistake accounting quality signals for real business durability, misread competitive dynamics, or simply pick stocks that underperform the market. There is no guarantee that a focus on earnings quality will beat an index or deliver positive returns.
Concentration risk is real. The fund holds 150–250 stocks, which is fewer than a broad market index, so overweighting or underweighting specific sectors or companies magnifies the impact of a wrong call.
Style risk matters too. In periods when the market is purely momentum-driven — when investors are willing to pay any price for growth, regardless of current profits — a quality-focused portfolio can lag. A company with weak current earnings but strong future growth potential might outperform a company with stable, reliable current earnings.
Finally, like all stock funds, FTCE is exposed to broad market downturns. Recessions, geopolitical shocks, or panics that ripple through equities will depress the fund’s value. The quality of the underlying earnings provides some downside protection, but it does not prevent losses in severe downturns.
How to research this fund
Read First Trust’s factsheet and prospectus, which explain the selection methodology and show the current holdings. Review the fund’s performance versus the S&P 500 and versus other quality-focused or earnings-driven ETFs over one, three, five, and ten-year periods. Understand that near-term underperformance is normal and common — patience is required for a quality strategy. Look at the sector allocation and top ten holdings to get a sense of whether the portfolio matches your views on which areas of the market are attractive. Finally, consider whether an active earnings-quality approach appeals to you philosophically, or whether you would be happier with a low-cost passive index fund that aims simply to match the market.