First Trust Small Cap Growth AlphaDEX Fund (NASDAQ: FYC)

Latest News for First Trust Small Cap Growth AlphaDEX Fund (NASDAQ:FYC)

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First Trust Large Cap Growth Opportunities AlphaDEX Fund

First Trust Launches Another Dorsey Wright ETF

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Small Cap ETF (FYC) Hits New 52-Week High

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Broad U.S. Equity ETFs

CPRT

iShares Morningstar Small Growth Index Fund

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Rydex ETF Trust S&P Smallcap 600 Pure Growth ETF

Best &amp; Worst ETFs and Mutual Funds: Small-cap Growth Style

First Trust is adding to its already expansive lineup of exchange-traded funds tracking Dorsey Wright index and methodologies with the debut of the First Trust Dorsey Wright DALI 1 ETF (NASDAQ: <a class="ticker" href="/stock/dali#NASDAQ">DALI</a>).
The new ETF tracks the Nasdaq Dorsey Wright DALI 1 Index, which was launched just a few weeks ago, <a href="https://www.ftportfolios.com/LoadContent/geaucpbzgcho">according to materials</a> provided by First Trust.
&ldquo;The Dynamic Asset Level Investing (DALI) process was designed as a tactical tool to provide guidance for asset allocation decisions among asset classes, as well as within asset classes, steering an investor toward those areas of the market that DWA believes may outperform,&rdquo; said Illinois-based First Trust.
<h3>
	What Happened</h3>
DALI&#39;s index assesses relative strength on four major asset classes: domestic equities, international stocks, bonds and commodities. As is the case with many Doresy Wright benchmarks, point-and-figure charting is used to gauge price momentum of the <a href="http://www.etf.com/sections/daily-etf-watch/dorsey-wright-etf-launches?nopaging=1">securities being considered</a>.
&ldquo;The DALI process is used to evaluate supply and demand forces of asset classes, and rank them from strongest to weakest based on Nasdaq Dorsey Wright&rsquo;s proprietary relative strength methodology,&rdquo; according to a statement from <a href="The asset class with the highest relative strength score is selected for inclusion in the index and the fund's assets will be allocated to ETFs that provide exposure to the asset class.">First Trust</a>. &ldquo;The asset class with the highest relative strength score is selected for inclusion in the index and the fund&rsquo;s assets will be allocated to ETFs that provide exposure to the asset class.&rdquo;
<h3>
	Why It&#39;s Important </h3>
When DALI, the new ETF, tilts toward U.S. stocks, its selection universe will focus on the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: <a class="ticker" href="/stock/fv#NASDAQ">FV</a>), which holds First Trust bank, consumer durables, Internet and technology ETFs.
The First Trust Large Cap Growth AlphaDEX Fund (NASDAQ: <a class="ticker" href="/stock/ftc#NASDAQ">FTC</a>) and the First Trust Small Cap Growth AlphaDEX Fund (NASDAQ: <a class="ticker" href="/stock/fyc#NASDAQ">FYC</a>) will be DALI&#39;s other holdings when the new fund emphasizes U.S. stocks.
When DALI tilts toward international stocks, it will equally weight the components in FV&#39;s international equivalent, the First Trust Dorsey Wright International Focus 5 ETF (NASDAQ: <a class="ticker" href="/stock/ifv#NASDAQ">IFV</a>) with 35 percent of the portfolio allocated to the First Trust Emerging Markets AlphaDEX Fund (NASDAQ: <a class="ticker" href="/stock/fem#NASDAQ">FEM</a>) and the First Trust Developed Markets ex-US AlphaDEX Fund (NASDAQ: <a class="ticker" href="/stock/fdt#NASDAQ">FDT</a>).
<h3>
	What&#39;s Next</h3>
&ldquo;The DALI process was designed as a tactical tool to provide guidance for asset allocation decisions among asset classes, as well as within asset classes, steering an investor toward those areas of the market that Nasdaq Dorsey Wright believes may outperform,&rdquo; said First Trust.
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For investors seeking momentum, First Trust Small Cap Growth AlphaDEX Fund <a href="http://www.zacks.com/stock/quote/FYC">FYC</a> is probably on radar now. The fund just hit a 52-week high and is up nearly 29% from its 52-week low price of $30.02/share.
For investors seeking momentum, First Trust Small Cap Growth AlphaDEX Fund FYC is probably on radar now. The fund just hit a 52-week high and is up nearly 29% from its 52-week low price of $30.02/share.
	But are more gains in store for this ETF? Let&#39;s take a quick look at the fund and the near-term outlook on it to get a better idea on where it might be headed:
	FYC in Focus
	This fund seeks to provide exposure to the small cap segment with a slightly active choice as it uses the AlphaDEX methodology to select the stock. It has key holdings in financials, healthcare, information technology, industrials, and consumer discretionary and is highly diversified across components with none holding more than 0.94% share. The product charges 70 bps in fees per year (see: <a href="https://www.zacks.com/funds/etfs/etf-categories/Small-Cap-ETFs-3">all the Small Cap ETFs here</a>).
	Why the Move?
	The small cap space of the broad U.S. stock market has been an area to watch lately given the roaring stock market coupled with volatility and uncertainty surrounding geopolitics, political instability in Europe and overvaluation concerns. Small cap stocks are the biggest beneficiaries of this trend as these are closely tied to the U.S. economy and are not highly exposed to the international market.
	More Gains Ahead?
	Currently, FYC has a Zacks ETF Rank of 3 or &lsquo;Hold&#39; rating with a High risk outlook. Therefore, it is hard to get a handle on its future returns one way or the other. However, many of the segments that make up this ETF have a strong Zacks Industry Rank. As a result, there is still some promise for investors who want to ride on this surging ETF.
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The small-cap growth style ranks eighth out of the twelve fund styles as detailed in my <a href="http://blog.newconstructs.com/2012/10/11/investment-style-rankings-for-etfs-mutual-funds/">style rankings for ETFs and mutual funds</a>. It gets my Dangerous rating, which is based on aggregation of ratings of 11 ETFs and 493 mutual funds in the small-cap growth style as of October 19, 2012. Prior reports on the best &amp; worst ETFs and mutual funds in every sector and style are <a href="http://www.newconstructs.com/nc/research/report/etf-and-fund-reports.htm">here</a>.

	Figure 1 ranks from best to worst the eight small-cap growth ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated small-cap growth mutual funds. Not all small-cap growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 27 to 1282), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.

	To <a href="http://blog.newconstructs.com/2012/10/09/how-to-find-the-best-etfs-2/">identify the best</a> and <a href="http://blog.newconstructs.com/2012/10/16/how-to-avoid-the-worst-etfs-2/">avoid the worst</a> ETFs and mutual funds within the small-cap growth style, investors need a <a href="http://blog.newconstructs.com/2011/11/23/predictive-fund-rating-methodology/">predictive rating</a> based on (1) <a href="http://blog.newconstructs.com/2011/11/22/portfolio-management-rating-methodology/">stocks ratings</a> of the holdings and (2) the <a href="http://blog.newconstructs.com/2011/10/28/total-annual-costs-methodology/">all-in expenses</a> of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed <a href="http://blog.newconstructs.com/2011/11/23/predictive-fund-rating-methodology/">here</a>.

	Investors should not buy any small-cap growth ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a <a href="http://blog.newconstructs.com/2012/09/17/less-than-1-of-managers-deliver-alpha-here-are-details/">long history</a> of not paying off.

	Get my ratings on all ETFs and mutual funds in this style on my free <a href="http://www.newconstructs.com/nc/fundscreener/fund-screener.htm?task=ACTION_CATEGORY_TYPE_SEARCH&amp;selectedTypes=0,1&amp;selectedCategoryIds=5d917900114e11e1a25d00188b533b34">mutual fund and ETF screener</a>.
<div>

		Figure 1: ETFs with the Best &amp; Worst Ratings
</div>

	<a href="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig1.jpg"><img alt="" class="aligncenter size-full wp-image-4887" height="224" src="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig1.jpg" title="SmallCapGrowthFig1" width="333" /></a>

	* Best ETFs exclude ETFs with NAV less than 100 million.
<div>

		Sources: New Constructs, LLC and company filings
</div>

	Rydex S&amp;P Smallcap 600 Pure Growth (NYSE: <a class="ticker" href="/stock/rzg#NYSE">RZG</a>), Vanguard S&amp;P Small-Cap 600 Growth ETF (vVIOG), and First Trust Small Cap Growth AlphaDEX Fund (NYSE: <a class="ticker" href="/stock/fyc#NYSE">FYC</a>) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.
<div>

		Figure 2: Mutual Funds with the Best &amp; Worst Ratings &ndash; Top 5
</div>

	<a href="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig2.jpg"><img alt="" class="aligncenter size-full wp-image-4886" height="247" src="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig2.jpg" title="SmallCapGrowthFig2" width="333" /></a>

	* Best mutual funds exclude funds with NAVs less than 100 million.
<div>

		Sources: New Constructs, LLC and company filings
</div>

	Virtus Equity Trust: Virtus Small-Cap Sustainable Growth Fund (NYSE: PXSGX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.

	Rydex S&amp;P Smallcap 600 Pure Growth (NYSE: <a class="ticker" href="/stock/rzg#NYSE">RZG</a>) is my top-rated small-cap growth ETF and Neuberger Berman Equity Funds: Neuberger Berman Genesis Fund (NYSE: NBGIX) is my top-rated small-cap growth mutual fund. Both earn my Neutral rating.

	iShares Morningstar Small Growth Index Fund (NYSE: <a class="ticker" href="/stock/jkk#NYSE">JKK</a>) is my worst-rated small-cap growth ETF and Security Equity Fund: Small Cap Growth Series (NYSE: SEPBX) is my worst-rated small-cap growth mutual fund. JKK earns my Dangerous rating, while SEPBX receives my Very dangerous rating.

	Figure 3 shows that 387 out of the 2052 stocks (over 23% of the total net assets) held by small-cap growth ETFs and mutual funds get an Attractive-or-better rating. However, no small-cap growth ETFs or small-cap growth mutual funds get an Attractive-or-better rating.

	The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and growth ETFs hold poor quality stocks.
<div>

		Figure 3: Small-cap growth Style Landscape For ETFs, Mutual Funds &amp; Stocks
</div>
<div>

		<a href="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig3.jpg"><img alt="" class="aligncenter size-full wp-image-4885" height="156" src="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig3.jpg" title="SmallCapGrowthFig3" width="401" /></a>

		Sources: New Constructs, LLC and company filings
</div>

	As detailed in &ldquo;<a href="http://blog.newconstructs.com/2012/07/20/low-cost-funds-dupe-investors-2/">Cheap Funds Dupe Investors</a>&rdquo;, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good <a href="http://blog.newconstructs.com/2011/11/22/portfolio-management-rating-methodology/">portfolio management</a>.

	Investors need to tread carefully when considering small-cap growth ETFs and mutual funds, as no mutual funds in the small-cap growth style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Focus on individual stocks instead.

	Copart Inc. (NASDAQ: <a class="ticker" href="/stock/cprt#NASDAQ">CPRT</a>) is one of my favorite stocks held by small-cap growth funds. It receives my Very Attractive rating. Copart is an online auto auction website. It has generated positive <a href="http://www.newconstructs.com/nc/help/glossary.htm">economic earnings</a> each of the past fourteen years, which translates into value for shareholders. It also trades at a <a href="http://blog.newconstructs.com/2012/06/18/price-to-economic-book-value-or-price-to-ebv/">price-to-economic book value</a> (P/EBV) of 1.18. As a reference point, rival CarMax Inc. (KMX) trades at a P/EBV of 1.57. In exchange for the 25% discount in valuation, CPRT has a <a href="http://www.newconstructs.com/nc/help/glossary.htm">ROIC</a> of 19% compared to KMX&rsquo;s ROIC of 14%. This discrepancy in profitability may be due to advertising expenses. CPRT only allocates $6.5 million to advertising compared to the $100.3 million that Carmax spent. Sometimes there are opportunities for investors to pick up stock in lesser-known companies at a bargain price. This appears to be the case with CPRT.

	Nuance Communications, Inc. (NASDAQ: <a class="ticker" href="/stock/nuan#NASDAQ">NUAN</a>) is one of my least favorite stocks held by small-cap growth funds. NUAN offers low profitability at a high cost resulting in a Very Dangerous rating. NUAN has never generated positive <a href="http://www.newconstructs.com/nc/help/glossary.htm">free cash flows</a>, which makes it all the more unbelievable that the market values the stock at 20.5x its <a href="http://blog.newconstructs.com/2012/06/18/price-to-economic-book-value-or-price-to-ebv/">economic book value</a>. To justify this valuation, the company would have to grow their <a href="http://www.newconstructs.com/nc/help/glossary.htm">after-tax operating earnings</a> (NOPAT) at 20%, compounded-annually, for thirteen years. While the company may grow revenues and earnings in the future, it will only create value for shareholders if it exceeds the expectations already in the stock price. I suggest investors invest in stocks with lower expectations and better historical profits.

	Figures 4 and 5 show the rating landscape of all small-cap growth ETFs and mutual funds.

	Our <a href="http://blog.newconstructs.com/2012/10/11/investment-style-rankings-for-etfs-mutual-funds/">style rankings for ETFs and mutual funds</a> report ranks all styles and highlights those that offer the best investments.
<div>

		Figure 4: Separating the Best ETFs From the Worst Funds
</div>
<div>

		<a href="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig4.jpg"><img alt="" class="aligncenter size-full wp-image-4884" height="245" src="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig4.jpg" title="SmallCapGrowthFig4" width="409" /></a>

		Sources: New Constructs, LLC and company filings
</div>
<div>

		Figure 5: Separating the Best Mutual Funds From the Worst Funds
</div>
<div>

		<a href="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig5.jpg"><img alt="" class="aligncenter size-full wp-image-4883" height="245" src="http://blog.newconstructs.com/wp-content/uploads/2012/10/SmallCapGrowthFig5.jpg" title="SmallCapGrowthFig5" width="409" /></a>

		Sources: New Constructs, LLC and company filings
</div>

	Review my <a href="http://www.newconstructs.com/nc/fundscreener/fund-screener.htm?task=ACTION_CATEGORY_TYPE_SEARCH&amp;selectedTypes=0,1&amp;selectedCategoryIds=5d917900114e11e1a25d00188b533b34">full list</a> of ratings and rankings along with reports on all 11 ETFs and 493 mutual funds in the small-cap growth style.

	Disclosure: I receive no compensation to write about any specific stock, sector, style or&nbsp;theme.

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Latest News for First Trust Small Cap Growth AlphaDEX Fund (NASDAQ:FYC)

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