First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS) seeks to track the NASDAQ AlphaDEX Emerging Markets Small Cap Index, which selects and weights small-capitalization stocks from emerging market countries based on growth and value factors rather than market capitalization. This emerging markets equity ETF targets smaller companies across developing economies including China, India, Taiwan, and Brazil.
How It Works
FEMS uses a quantitative, rules-based approach that screens emerging market small-cap 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 semi-annually in April and October. The fund typically holds 200-300 positions across multiple emerging market countries, providing diversified exposure to smaller companies often overlooked by large-cap focused emerging market ETFs.
Key Features
- Factor-based selection methodology targets undervalued small-cap stocks with strong growth characteristics in emerging markets
- Equal weighting within sectors prevents concentration in largest companies, providing broader small-cap exposure than cap-weighted alternatives
- Covers multiple emerging market countries including China, India, Taiwan, Brazil, and South Korea for geographic diversification
Risks
- This ETF can lose value significantly during emerging market selloffs, potentially declining 40-60% during global risk-off periods like 2008 or 2020
- Small-cap emerging market stocks face higher liquidity risk and can experience extreme volatility during currency crises or political instability
- Currency fluctuations against the U.S. dollar can amplify losses when emerging market currencies weaken during global uncertainty
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 small-cap exposure. High risk tolerance required due to extreme volatility potential. Appropriate for investors wanting to complement large-cap emerging market positions or add factor-based diversification to international portfolios.