First Trust Emerging Markets AlphaDEX Fund (FEM) seeks to track the NASDAQ AlphaDEX Emerging Markets Index, which selects and weights emerging market stocks based on growth and value factors rather than market capitalization. This enhanced indexing approach targets companies from developing economies including China, India, Brazil, and other emerging markets.
How It Works
FEM uses a rules-based methodology that screens emerging market stocks using growth factors (sales growth, one-year sales growth) and value factors (book value-to-price, cash flow-to-price). Selected stocks are equally weighted within sectors and rebalanced quarterly. Unlike traditional market-cap weighted emerging market ETFs, this approach reduces concentration in the largest companies while potentially capturing smaller, faster-growing firms across approximately 20+ emerging market countries.
Key Features
- Factor-based selection methodology may outperform during periods when growth and value factors drive returns in emerging markets
- Equal weighting within sectors reduces concentration risk compared to cap-weighted emerging market ETFs dominated by Chinese mega-caps
- Provides 2.93% dividend yield while maintaining exposure to emerging market growth potential across diverse economies
Risks
- This ETF can lose significant value during emerging market selloffs, potentially declining 40-60% during global risk-off periods like 2008 or 2020
- Currency fluctuations against the U.S. dollar can amplify losses when emerging market currencies weaken during economic stress
- Political instability, regulatory changes, or economic crises in major emerging markets like China or India could severely impact performance
Who Should Own This
Best suited as a satellite holding (5-15% of equity allocation) for aggressive investors with 7+ year time horizons seeking emerging market exposure with factor tilts. High risk tolerance required due to extreme volatility. Appropriate for investors wanting alternatives to traditional cap-weighted emerging market ETFs and comfortable with concentrated geographic risk.