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Should First Trust Small Cap Growth AlphaDEX ETF (FYC) Be on Your Investing Radar?

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The First Trust Small Cap Growth AlphaDEX ETF (FYC - Free Report) was launched on 04/19/2011, and is a passively managed exchange traded fund designed to offer broad exposure to the Small Cap Growth segment of the US equity market.

The fund is sponsored by First Trust Advisors. It has amassed assets over $428.58 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.

Growth stocks have higher than average sales and earnings growth rates. While these are expected to grow faster than the broader market, they also have higher valuations. Something to keep in mind is the higher level of volatility that is affiliated with growth stocks. Even though growth stocks are more likely to outperform their value counterparts in strong bull markets, value stocks have a record of delivering better returns in almost all markets than growth stocks.

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 more expensive products in the space.

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

Sector Exposure and Top Holdings

While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. 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 19.70% of the portfolio. Consumer Discretionary and Information Technology round out the top three.

Looking at individual holdings, Calix, Inc. (CALX - Free Report) accounts for about 0.81% of total assets, followed by B. Riley Financial, Inc. (RILY - Free Report) and Triumph Bancorp, Inc. (TBK - Free Report) .

The top 10 holdings account for about 7.43% 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 has gained about 17.89% so far this year and it's up approximately 71.92% in the last one year (as of 06/18/2021). In the past 52-week period, it has traded between $40.59 and $75.91.

The ETF has a beta of 1.27 and standard deviation of 30.39% 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 carries a Zacks ETF Rank of 3 (Hold), which is based on expected asset class return, expense ratio, and momentum, among other factors. Thus, FYC is a reasonable option for those seeking exposure to the Style Box - Small Cap Growth area of the market. Investors might also want to consider some other ETF options in the space.

The iShares Russell 2000 Growth ETF (IWO - Free Report) and the Vanguard SmallCap Growth ETF (VBK - Free Report) track a similar index. While iShares Russell 2000 Growth ETF has $12.03 billion in assets, Vanguard SmallCap Growth ETF has $15.68 billion. IWO has an expense ratio of 0.24% and VBK charges 0.07%.

Bottom-Line

Passively managed ETFs are becoming increasingly popular with institutional as well as retail investors due to their low cost, transparency, flexibility and tax efficiency. They are 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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