First Trust China AlphaDEX Fund (FCA)

FCA divides itself into two interdependent dimensions: the selection methodology (AlphaDEX, a value-and-momentum screen) and the market universe (Chinese small- and mid-cap stocks). The fund does not track a passive index but rather applies First Trust’s rules-based scoring to identify and overweight companies with favorable fundamental and technical signals, underweighting those with poor scores.

The AlphaDEX selection methodology

First Trust’s AlphaDEX system screens the universe of eligible Chinese stocks using a combination of value metrics (price-to-earnings, price-to-book, price-to-sales, dividend yield) and momentum signals (relative price strength, recent returns). Stocks that rank high on both dimensions — cheap and rising — receive larger positions; stocks that fail on both dimensions are excluded or minimized. The approach is systematic and rules-based, meaning the same methodology is applied consistently over time and the weightings adjust transparently as scores change.

This value-plus-momentum combination works when cheap stocks outperform and momentum persists. It underperforms when value and momentum diverge — when cheap companies stagnate and growth stocks continue rallying, the strategy’s higher costs relative to a passive index fund become a drag. First Trust’s wager is that Chinese small- and mid-cap markets, being less efficiently priced than global megacap stocks, experience enough mispricings to reward systematic screening.

The Chinese small- and mid-cap universe

FCA restricts its holdings to companies below a defined market-capitalization threshold. Large Chinese companies (Alibaba, Tencent, others) are widely followed and highly liquid; smaller companies trade less frequently and attract fewer analysts. That lower attention, First Trust reasons, creates opportunities for pricing discrepancies. The downside is also clear: smaller Chinese companies have less financial transparency, higher operating volatility, and greater vulnerability to regulatory shifts or economic downturns than their megacap peers. An investor in FCA is explicitly accepting that operational and regulatory risk in exchange for potential mispricing.

Currency and geopolitical friction

FCA’s underlying holdings are priced in Chinese yuan. Dollar-based investors experience an additional return driver (or drag): the exchange rate between yuan and dollar. When the yuan strengthens, FCA’s holdings gain value in dollar terms independent of stock performance. When the yuan weakens, the reverse occurs. This currency exposure is layered on top of the stock-selection risk, creating a separate volatility axis.

Additionally, foreign investment in Chinese equities is subject to evolving rules — capital controls, delisting policies, and data restrictions all change at the government’s discretion. Political tensions between the United States and China have periodically created uncertainty around foreign holdings and repatriation, affecting fund liquidity and investor confidence. FCA’s prospectus lists these regulatory risks explicitly; investors should view them as real rather than theoretical.

Costs and execution

FCA’s expense ratio runs at 0.80 percent, covering First Trust’s management of the AlphaDEX system and the fund’s trading operations. Because the portfolio holds smaller, less-liquid stocks, the fund’s own rebalancing and trading can incur wider bid-ask spreads and slippage compared to funds focused on megacap stocks. The fund trades on US exchanges with adequate but not exceptional liquidity — standard-sized trades execute easily, but very large positions require careful execution.

Who this attracts and when

FCA suits investors with conviction that Chinese small- and mid-cap stocks are undervalued and that value-and-momentum screens can isolate winners. Some use it as a thematic position within a broader China allocation; others view it as a way to gain exposure to Chinese growth stories that don’t fit megacap categories. It is ill-suited for conservative investors seeking large, stable, government-backed enterprises, or for those unwilling to tolerate currency and regulatory risk.

The fund’s performance depends critically on whether AlphaDEX’s screening proves predictive in the Chinese market. Review First Trust’s documentation on the system, examine the portfolio’s composition and performance over complete market cycles, and assess whether the returns have justified the 0.80 percent fee and the underlying risks.