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Designed to provide broad exposure to the Small Cap Growth segment of the US equity market, the First Trust Small Cap Growth AlphaDEX ETF (FYC) is a passively managed exchange traded fund launched on 04/19/2011.

The fund is sponsored by First Trust Advisors. It has amassed assets over $459.73 million, making it one of the average sized ETFs attempting to match the Small Cap Growth segment of the US equity market.

Why Small Cap Growth

There’s a lot of potential to investing in small cap companies, but with market capitalization below $2 billion, that high potential comes with even higher risk.

While growth stocks do boast higher than average sales and earnings growth rates, and they are expected to grow faster than the wider market, investors should note these kinds of stocks have higher valuations. Something to keep in mind is the higher level of volatility that is affiliated with growth stocks. Compared to value stocks, growth stocks are a safer bet in a strong bull market, but don’t perform as strongly in almost all other financial environments.

Costs

Expense ratios are an important factor in the return of an ETF and in the long term, cheaper funds can significantly outperform their more expensive counterparts, other things remaining the same.

Annual operating expenses for this ETF are 0.71%, making it one of the most expensive products in the space.

It has a 12-month trailing dividend yield of 0.10%.

Sector Exposure

It is important to delve into an ETF’s holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation to the Healthcare sector–about 23.80% of the portfolio. Information Technology and Consumer Discretionary round out the top three.

Looking at individual holdings, Nantkwest (NK) accounts for about 0% of total assets, followed by 1.09 ( Inc.) and Exp World Holdings (EXPI).

The top 10 holdings account for about 9.06% of total assets under management.

Performance and Risk

FYC seeks to match the performance of the Nasdaq AlphaDEX Small Cap Growth Index before fees and expenses. The NASDAQ AlphaDEX Small Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 700 Small Cap Growth Index.

The ETF return is roughly 21.36% so far this year and is up about 131.29% in the last one year (as of 03/15/2021). In the past 52-week period, it has traded between $27.59 and $75.91.

The ETF has a beta of 1.30 and standard deviation of 29.82% for the trailing three-year period, making it a high risk choice in the space. With about 263 holdings, it effectively diversifies company-specific risk.

Alternatives

First Trust Small Cap Growth AlphaDEX ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, FYC is a great option for investors seeking exposure to the Style Box – Small Cap Growth segment of the market. There are other additional ETFs in the space that investors could consider as well.

The iShares Russell 2000 Growth ETF (IWO) and the Vanguard SmallCap Growth ETF (VBK) track a similar index. While iShares Russell 2000 Growth ETF has $12.78 billion in assets, Vanguard SmallCap Growth ETF has $15.34 billion. IWO has an expense ratio of 0.24% and VBK charges 0.07%.

Bottom-Line

Retail and institutional investors increasingly turn to passively managed ETFs because they offer low costs, transparency, flexibility, and tax efficiency; these kind of funds are also excellent vehicles for long term investors.

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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iShares Russell 2000 Growth ETF (IWO): ETF Research Reports
 
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