Is First Trust Small Cap Growth AlphaDEX ETF a Strong ETF Right Now?

Launched on 04/19/2011, the First Trust Small Cap Growth AlphaDEX ETF FYC is a smart beta exchange traded fund offering broad exposure to the Style Box - Small Cap Growth category of the market.

What Are Smart Beta ETFs?

The ETF industry has long been dominated by products based on market cap weighted indexes, a strategy created to reflect the market or a particular market segment.

Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.

There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.

Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

The fund is sponsored by First Trust Advisors. It has amassed assets over $328.59 million, making it one of the average sized ETFs in the Style Box - Small Cap Growth. Before fees and expenses, this particular fund seeks to match the performance of the Nasdaq AlphaDEX Small Cap Growth Index.

The NASDAQ AlphaDEX Small Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 700 Small Cap Growth Index.

Cost & Other Expenses

Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.

Operating expenses on an annual basis are 0.70% for FYC, making it one of the most expensive products in the space.

It's 12-month trailing dividend yield comes in at 0.41%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure which minimizes single stock risk, it is still important to look into a fund's holdings before investing. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

For FYC, it has heaviest allocation in the Healthcare sector --about 22.90% of the portfolio --while Industrials and Information Technology round out the top three.

When you look at individual holdings, Adma Biologics, Inc. ADMA accounts for about 0.92% of the fund's total assets, followed by Mirum Pharmaceuticals, Inc. MIRM and Zeta Global Holdings Corp. (class A) ZETA.

Its top 10 holdings account for approximately 7.9% of FYC's total assets under management.

Performance and Risk

So far this year, FYC has added roughly 16.21%, and was up about 25.24% in the last one year (as of 09/17/2024). During this past 52-week period, the fund has traded between $51.50 and $73.05.

The fund has a beta of 1.18 and standard deviation of 24.03% for the trailing three-year period, which makes FYC a high risk choice in this particular space. With about 265 holdings, it effectively diversifies company-specific risk.

Alternatives

First Trust Small Cap Growth AlphaDEX ETF is a reasonable option for investors seeking to outperform the Style Box - Small Cap Growth segment of the market. However, there are other ETFs in the space which investors could consider.

IShares Russell 2000 Growth ETF IWO tracks Russell 2000 Growth Index and the Vanguard Small-Cap Growth ETF VBK tracks CRSP U.S. Small Cap Growth Index. IShares Russell 2000 Growth ETF has $11.60 billion in assets, Vanguard Small-Cap Growth ETF has $17.61 billion. IWO has an expense ratio of 0.24% and VBK charges 0.07%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Style Box - Small Cap Growth.

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