First Trust Materials AlphaDEX Fund (FXZ)

FXZ screens the materials sector — companies that mine metals, produce chemicals, or cut timber — looking for stocks that are cheap relative to their growth and showing upward price momentum. It is not a broad materials index. It is a concentrated bet on cheaper, rising materials stocks using a mechanical quantitative screen.

The materials sector and what FXZ holds

Materials is the catchall name for companies that extract or process raw commodities: mining (copper, iron, gold, coal), chemicals (industrials chemicals, fertilizers, polymers), forest products (timber, pulp, paper), and related businesses. These companies are cyclical — their profits swing sharply with commodity prices and the global economic cycle. When factories are booming and construction is hot, materials companies flourish. In a recession, they struggle.

FXZ holds typically 40–80 materials stocks, both large caps like diversified mining giants and mid-caps focused on single commodities or specialized chemicals. The AlphaDEX screen ranks them on valuation and momentum, then weights the portfolio toward stocks that score well on both metrics — cheap but rising.

Cyclicality and the value-momentum tilt

Materials stocks become cheap for a reason: either commodity prices are weak (depressing margins) or the sector is falling out of favor with investors. A value screen that hunts for cheap materials stocks is, in effect, hunting for companies that appear to have fallen too far.

The momentum component is the flip side: it seeks materials stocks that are recovering. This combination — value plus momentum — is theoretically powerful in cyclical sectors. A mining stock that has crashed 60 percent but has just started recovering might score well on both the cheapness metric (low valuation) and the momentum metric (recent price gains). This is the sweet spot that AlphaDEX is designed to catch.

In practice, this works well during the early phase of a cyclical recovery but can backfire if the recovery is premature. A materials stock might gain momentum and appear cheap but then reverse sharply if commodity prices fall again or if a recession emerges. The screen cannot distinguish a genuine recovery from a dead-cat bounce.

How the screen mechanically works

First Trust applies fixed rules every quarter. The fund ranks each materials stock on metrics like price-to-book, price-to-earnings, and forward earnings growth (the value part) and on short-term relative price strength (the momentum part). Stocks scoring well on the composite are included; those that fall below the threshold are excluded. The portfolio is reweighted quarterly.

This is rule-based and transparent — there is no portfolio manager making judgment calls. It is also mechanical and emotionless, which is a virtue if the screens are well-designed but a risk if they become overcrowded or if market conditions shift in ways the screen does not anticipate.

Volatility and cyclical swings

Materials is one of the most volatile sectors in the equity market. Even a cap-weighted materials index has roughly 50 percent higher volatility than the broader stock market. FXZ, being concentrated and tilted toward mid-caps and smaller large-caps, is more volatile still.

In years when the global economy is robust and commodity prices rally, FXZ can produce spectacular gains. In recessions or commodity slumps, it can fall steeply. An investor using FXZ must be prepared for large drawdowns and have a long enough time horizon to ride them out.

Composition shifts with the economic cycle

During commodity booms, FXZ might tilt toward mining and metals. During periods of weakness, chemicals and forest products might dominate. The fund’s actual portfolio changes not just because of rebalancing but because the economic conditions that drive the momentum screen shift.

A sector correction in materials — a sudden 20–30 percent drop in commodity prices — can cause even the “best” materials stocks to fall sharply. No amount of clever screening will protect FXZ from a broad sector rotation or a demand collapse.

Costs and liquidity

FXZ trades on NASDAQ with a typical active-ETF expense ratio of 0.60–0.70 percent. Liquidity is reasonable but not as robust as a mega-cap fund. The bid-ask spread can widen during market stress or periods of low trading volume.

The risk of timing the cycle

The implicit bet in FXZ is that the AlphaDEX value-and-momentum screens will help you buy materials stocks early in a recovery and sell before a downturn. In theory, this is compelling. In practice, no screen can time the cycle perfectly, and materials is an unforgiving sector for bad timing.

A materials stock might look cheap and be gaining momentum — meeting the AlphaDEX criteria — yet still have much further to fall if a recession is imminent. Conversely, a materials stock might still appear expensive and falling in momentum yet prove to be the first to recover as conditions improve.

How to research FXZ

Read First Trust’s prospectus and fact sheet to understand the exact screening criteria and the rebalancing rules. Examine FXZ’s performance over full market cycles — 2008 crisis, 2011 debt crisis, 2015–2016 commodity crash, 2020 pandemic drop, 2021–2022 inflation surge. In each cycle, see when FXZ peaked and when it bottomed relative to a simple cap-weighted materials index.

Look at the fund’s current holdings and understand which commodity exposures dominate. Monitor commodity prices and economic forecasts to gauge whether the materials cycle is early, mid, or late in its recovery.

FXZ is a tactical materials exposure, not a long-term buy-and-hold alternative to owning the sector broadly. Use it when you believe materials are cheap and about to recover, and plan to exit when valuations have normalized or momentum has stalled. Holding it through a full commodity cycle — waiting for a recovery that takes longer than expected — is a way to tie up capital and realize disappointing returns.