First Trust Multi Cap Value AlphaDEX Fund (FAB)

The First Trust Multi Cap Value AlphaDEX Fund (FAB) targets a gap that has long plagued value investors: how to buy cheap stocks without accidentally loading up on corporate corpses. It holds mid-cap and large-cap stocks that trade at low valuations, but filters them through an algorithmic system that looks for cheap stocks that still have some underlying strength — the combination supposed to avoid the worst value traps while capturing the value premium.

The value trap problem that sparked the design

Value investing sounds simple: buy stocks trading cheap on earnings or book value, wait for the market to recognize their worth, and profit when prices rise. The research backing this strategy is solid. Over long periods, cheap stocks have outperformed expensive ones. It is called the value premium, and it is one of the most documented patterns in finance.

But there is a catch. Not all cheap stocks are bargains. Some are cheap because they deserve to be. A retailer losing market share, a bank with deteriorating loan quality, a manufacturer with obsolete plants — these are not opportunities; they are value traps. An investor who mechanically buys the cheapest stocks in the market will inadvertently own a lot of corpses.

FAB was built to solve this problem. It starts with a value screen — stocks trading cheaply — but then applies AlphaDEX, a proprietary algorithm from Morningstar’s index division, to filter out the traps and favor value stocks that still show signs of health.

How AlphaDEX refines the classic value approach

The algorithm does not reveal its full methodology, but the broad idea is known: it ranks stocks on multiple dimensions beyond just price. It considers earnings quality, revenue trends, and momentum signals. A stock might be cheap on paper, but if its earnings are declining and its stock is falling, AlphaDEX scores it lower. Conversely, a cheap stock with stable or improving fundamentals and positive recent price action gets a higher score.

The result is a portfolio that is unquestionably value-tilted — the stocks trade at low multiples — but with a bias toward the value stocks least likely to be broken businesses. FAB holds typically 50 to 150 stocks and reconstitutes roughly quarterly, meaning the portfolio adapts as new data arrives.

This hybrid approach is not magic. It is an attempt to thread a needle: be cheap enough to capture the value premium, but not so cheap that you end up with a portfolio of terminal cases. Whether it succeeds in practice is an empirical question that changes with market conditions.

Sector and competitive positioning

FAB overweights sectors where value plays naturally cluster: financials, industrials, energy, consumer staples, healthcare. Technology and consumer discretionary, where growth-oriented companies dominate, show up less. This sector tilt is a direct consequence of the value strategy; it is not a separate choice but an emergent property of where the algorithm finds cheap stocks with potential.

The competition is intense. Hundreds of funds pursue value. Some charge less than FAB; others use simpler screens. The question for FAB is whether AlphaDEX’s refinement is worth its added cost. That is genuinely difficult to answer in advance, and the answer varies depending on market cycle and the specific period examined.

The factor-risk reality

Because every stock in FAB shares the “value” characteristic, the fund carries what is called factor risk. When the market loves value, FAB does well. When growth dominates, as happened consistently from 2010 to 2020, FAB lags for years. This is not a company-specific risk that diversification solves; it is a structural bet on a style of stocks.

An investor in FAB must be comfortable with extended periods of underperformance. If you panic and sell after three years of lagging the overall market, you have locked in losses and defeated the strategy. Value investing demands patience and conviction that the premium will eventually reassert itself.

Holdings, costs, and due diligence

FAB holds broadly traded, liquid stocks, so the ETF itself trades with reasonable bid-ask spreads. The expense ratio is modest for a factor-based fund but higher than a plain index tracker.

An investor researching FAB should compare its performance to a simple broad-market index and to other value-tilted ETFs over rolling periods of at least 10 years. Look at the sector breakdown and confirm it aligns with your expectations for a value portfolio. Read Morningstar’s description of AlphaDEX to understand what distinguishes it from a simpler value-screen approach. Historical returns are no promise of future performance, but they do reveal whether the AlphaDEX filter has delivered an edge in past cycles.