First Trust Small Cap Growth AlphaDEX Fund (FYC) seeks to track the NASDAQ AlphaDEX Small Cap Growth Index, which selects small-cap U.S. stocks based on growth factors including sales growth, one-year sales growth momentum, and price momentum. This growth-focused equity ETF targets companies with market capitalizations typically between $300 million and $2 billion.
How It Works
FYC uses First Trust's proprietary AlphaDEX methodology that ranks small-cap stocks on growth metrics, then applies equal weighting within sectors to reduce concentration risk. The fund reconstitutes annually each March and rebalances quarterly to maintain equal sector weights and capture new growth opportunities. Unlike market-cap weighted approaches, this rules-based strategy overweights stocks showing the strongest growth characteristics while maintaining sector diversification across approximately 100-150 holdings.
Key Features
- Equal-weighted approach within sectors prevents largest companies from dominating returns, unlike traditional market-cap weighted small-cap ETFs
- Focuses exclusively on growth characteristics rather than blending growth and value factors like broad small-cap alternatives
- Quarterly rebalancing captures momentum shifts and ensures continued exposure to highest-growth small-cap companies
Risks
- This ETF can lose value when growth stocks fall out of favor, potentially underperforming value-oriented small-cap funds during market rotations
- Small-cap concentration means higher volatility than large-cap ETFs, with potential for 40-50% declines during severe market downturns
- Equal weighting creates higher turnover costs and may lag during periods when largest small-cap stocks outperform significantly
Who Should Own This
Best suited as a satellite holding (10-20% of equity allocation) for aggressive investors with 5+ year time horizons seeking small-cap growth exposure. High risk tolerance required due to small-cap volatility and growth stock cyclicality. Appropriate for investors wanting to complement core holdings with targeted exposure to emerging growth companies.