First Trust Launches 2 Int’l Small-Cap ETFs

Alex Ulam
February 16, 2012


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 Schwab’s website.

AlphaDex Methodology

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 Trust’s website.

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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