First Trust, the money management firm behind the popular
Internet-related fund, "FDN," today launched two small-cap equities
ETFs that use its AlphaDex indexing methodology-one focused on
developed countries, the other on emerging markets.
The First Trust Developed Markets ex-US Small Cap AlphaDex Fund
(NYSEArca:FDTS) and the First Trust Emerging Markets Small Cap
AlphaDex Fund (NYSEArca:FEMS) will each have annual expense ratios
of 0.80 percent.
The launch comes on the heels of seven new single-country funds
that First Trust added to its lineup yesterday, which are also
built around the company's AlphaDex indexing strategy. First Trust
said that together, the nine funds reflect the company's view that
international investing has delivered attractive returns in recent
years, even if 2011 was an exception.
First Trust's new small-cap funds will go head-to-head with a
growing roster of small-cap-focused funds already being marketed by
big-name ETF firms such as San Francisco-based iShares, low-cost
provider Charles Schwab and State Street Global Advisors, the
sponsor behind the SPDR funds.
Investors have increasingly embraced strategies that hone in on
the small-cap equity segment for the higher-risk/higher-reward
profile of those stocks, especially as way to gain access to
developing markets. Small-cap equities are also generally thought
to reflect domestic consumption, as opposed to larger companies,
that are more directly linked to the global economy.
Small-cap ETFs focused on emerging markets are still relatively
young, though they have begun to get traction, particularly since
the global economic crisis began in earnest in 2008. Many see
small-cap investments in emerging markets as a hedge against market
disruptions in Europe and in the U.S.
For example, SSgA's SPDR Emerging Markets Small Cap ETF
(NYSEArca:EWX) now has gathered about $883.6 million since its 2008
launch, according to SSgA's website. The iShares newcomer to the
space, the iShares Emerging Markets Small Cap ETF (NYSEArca:EEMS),
has gathered $38.0 million since it came to market five months ago,
according to iShares' website.
iShares also has a pair of funds that canvass the
developed-world small-cap equity market. Those include the $1.2
billion iShares MSCI EAFE Small Cap ETF (NYSEArca:SCZ), which
focuses on developed economies outside the United States. It also
markets the much smaller iShares FTSE Developed Small Cap ex-North
America ETF (NYSEArca:IFSM), which has gathered only $34.6 million
since its 2007 launch, according to First Trust's website.
Another competing fund in the space is the two-year-old Schwab
International Small-Cap Equity ETF (NYSEArca:SCHC), which has
attracted nearly $148.3 million since its inception, according to
But First Trust's planned funds add a quasi-active wrinkle to
the otherwise-purely beta competing funds.
First Trust's AlphaDex quantitative indexing methodology seeks
to generate extra return relative to traditional pure-beta
market-capitalization-weighted indexes by employing an active
security selection process. The company first rolled out its
AlphaDex methodology in 2007.
As opposed to cap-weighted indexes that reflect the prices that
investors are willing to pay for a company based upon available
information, AlphaDex indexes utilize fundamentals- based indexes
that look at measures such as price to book value, price to cash
flow, price to sales, and return on assets to determine how much
weight a company should represent in an index.
First Trust already offers more than 30 AlphaDex ETFs tapping
into everything from country-specific portfolios, to sector, to
size and style methodologies, including the U.S.-focused First
Trust Small Cap Core ETF ( NYSEArca:FYX), which has gathered $162.7
million since it came to market in May 2007, according to First
Apart from its AlphaDex funds, the company is also known for its
niche ETF strategies, notably its $480 million First Trust Dow
Jones Internet ETF (NYSEArca:FDN).
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