First Trust Small Cap Value AlphaDEX Fund (FYT) seeks to track the NASDAQ AlphaDEX Small Cap Value Index, which selects undervalued small-cap U.S. stocks based on fundamental value metrics including book-to-price, cash-to-price, and return on assets ratios. This quantitative approach targets small companies trading below their intrinsic value.
How It Works
FYT uses First Trust's proprietary AlphaDEX methodology to rank small-cap stocks by multiple value factors, then applies equal weighting to selected securities rather than market-cap weighting. The fund reconstructs quarterly, systematically selling appreciated positions and buying newly qualified value candidates. Holdings typically range from 100-200 small-cap companies with market capitalizations under $2 billion, providing concentrated exposure to the most attractively valued smaller firms.
Key Features
- Equal-weighting methodology prevents largest holdings from dominating returns, unlike traditional market-cap weighted small-cap value ETFs
- Multi-factor value screening combines price-to-book, cash flow, and profitability metrics for comprehensive fundamental analysis approach
- Quarterly rebalancing enforces systematic value discipline by trimming winners and adding newly identified undervalued opportunities
Risks
- This ETF can lose value when value investing falls out of favor, as growth stocks may outperform value stocks for extended periods lasting several years
- Small-cap stocks exhibit higher volatility than large-caps, potentially declining 40-50% during market downturns while taking longer to recover peak values
- Equal weighting creates concentration risk as poor-performing individual holdings receive same allocation as strong performers, amplifying stock-specific losses
Who Should Own This
Best suited as a satellite holding (5-15% of equity allocation) for experienced investors with 3-7 year time horizons seeking small-cap value exposure. High risk tolerance required due to small-cap volatility and value strategy cyclicality. Appropriate for investors implementing factor-based strategies or complementing large-cap core holdings.