First Trust Small Cap Core AlphaDEX Fund (FYX) seeks to track the NASDAQ AlphaDEX Small Cap Core Index, which measures small-cap U.S. stocks selected and weighted using a proprietary multi-factor methodology that emphasizes growth and value characteristics rather than market capitalization.
How It Works
FYX uses an enhanced indexing approach that applies the AlphaDEX methodology to screen and rank small-cap stocks based on growth factors (sales growth, one-year sales growth) and value factors (book value to price, cash flow to price). The top-ranked stocks are selected and equally weighted within sectors, then rebalanced quarterly. This rules-based system typically holds 300-400 small-cap stocks with sector constraints to maintain diversification while overweighting stocks with the strongest factor scores.
Key Features
- Multi-factor selection process combines growth and value metrics, potentially outperforming pure market-cap weighted small-cap indexes during factor-favorable periods
- Equal weighting within sectors reduces concentration risk compared to cap-weighted alternatives, providing more balanced exposure across small-cap holdings
- Quarterly rebalancing captures momentum while maintaining systematic discipline, avoiding behavioral biases common in active small-cap stock selection strategies
Risks
- This ETF can lose value when growth and value factors underperform, as the AlphaDEX methodology may concentrate in out-of-favor stocks during certain market cycles
- Small-cap stocks exhibit higher volatility than large-caps, potentially declining 40-50% during bear markets with slower recovery periods than broad market indexes
- Factor-based strategies can experience multi-year underperformance periods when market conditions favor different characteristics than those emphasized by the AlphaDEX methodology
Who Should Own This
Best suited as a satellite holding (5-15% of equity allocation) for investors with 5+ year time horizons seeking small-cap exposure with factor tilts. High risk tolerance required due to small-cap volatility and factor concentration. Appropriate for investors who believe multi-factor approaches can generate alpha over traditional market-cap weighted small-cap indexes.