First Trust Mid Cap Value AlphaDEX Fund (FNK) seeks to track the NASDAQ AlphaDEX Mid Cap Value Index, which selects undervalued mid-cap stocks using fundamental value metrics like price-to-book, price-to-sales, and price-to-cash flow ratios. This actively-screened index provides exposure to approximately 75 mid-capitalization value companies.
How It Works
FNK uses First Trust's proprietary AlphaDEX methodology that ranks mid-cap stocks by multiple value factors, then equal-weights the top-scoring companies rather than using market-cap weighting. The fund reconstitutes annually each April and rebalances quarterly to maintain equal allocations across holdings. This quantitative approach systematically overweights stocks trading at discounts to fundamental metrics while avoiding traditional cap-weighted concentration in the largest companies.
Key Features
- Equal-weighting methodology prevents over-concentration in largest mid-cap names, providing more balanced exposure than traditional cap-weighted funds
- Multi-factor value screening using price-to-book, price-to-sales, and cash flow metrics identifies systematically undervalued companies
- Quarterly rebalancing captures value rotation opportunities while maintaining disciplined exposure to approximately 75 mid-cap value positions
Risks
- This ETF can lose significant value when value investing falls out of favor, as growth stocks may outperform for extended periods lasting several years
- Equal-weighting creates higher turnover costs and potential tax inefficiency compared to passive cap-weighted alternatives, reducing net returns over time
- Mid-cap stocks typically experience 20-30% higher volatility than large-caps, with potential for 40-50% declines during severe market downturns like 2008
Who Should Own This
Best suited as a satellite holding (10-20% of equity allocation) for investors with 3-5 year time horizons seeking mid-cap value exposure. Requires medium-to-high risk tolerance due to mid-cap volatility and value factor cyclicality. Works well for investors implementing factor-based strategies or seeking diversification from growth-heavy portfolios.