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

The First Trust Multi Cap Growth AlphaDEX ETF FAD was launched on 05/08/2007, and is a smart beta exchange traded fund designed to offer broad exposure to the Style Box - All 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.

Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.

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.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of 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 managed by First Trust Advisors. FAD has been able to amass assets over $204.85 million, making it one of the average sized ETFs in the Style Box - All Cap Growth. Before fees and expenses, this particular fund seeks to match the performance of the Nasdaq AlphaDEX Multi Cap Growth Index.

The NASDAQ AlphaDEX Multi Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 500 Large Cap Index, NASDAQ US 600 Mid Cap Index and NASDAQ US 700 Small Cap Index.

Cost & Other Expenses

Investors should also pay attention to an ETF's expense ratio. Lower cost products will produce better results than those with a higher cost, assuming all other metrics remain the same.

Annual operating expenses for FAD are 0.64%, which makes it on par with most peer products in the space.

The fund has a 12-month trailing dividend yield of 0.30%.

Sector Exposure and Top Holdings

While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

FAD's heaviest allocation is in the Industrials sector, which is about 26.10% of the portfolio. Its Information Technology and Consumer Discretionary round out the top three.

Looking at individual holdings, Nvidia Corporation accounts for about 0.62% of total assets, followed by Vistra Corp. and Arista Networks, Inc.

Its top 10 holdings account for approximately 5.3% of FAD's total assets under management.

Performance and Risk

The ETF has gained about 10.63% so far this year and is up roughly 18.30% in the last one year (as of 08/15/2024). In the past 52-week period, it has traded between $92.91 and $129.73.

The ETF has a beta of 1.11 and standard deviation of 20.62% for the trailing three-year period, making it a medium risk choice in the space. With about 672 holdings, it effectively diversifies company-specific risk.

Alternatives

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

IShares Morningstar Growth ETF ILCG tracks MORNINGSTAR US LARGE-MID CP BRD GRWTH ID and the iShares Core S&P U.S. Growth ETF IUSG tracks S&P 900 Growth Index. IShares Morningstar Growth ETF has $2.23 billion in assets, iShares Core S&P U.S. Growth ETF has $18.62 billion. ILCG has an expense ratio of 0.04% and IUSG charges 0.04%.

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 - All Cap Growth.

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