First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (FDTS)

The First Trust Developed Markets ex-US Small Cap AlphaDEX Fund (ticker FDTS) is an exchange-traded fund that invests in small-capitalization companies across developed economies outside the United States — Europe, Japan, Australia, Canada, and similar mature markets. Rather than weight its holdings by market capitalization, the fund applies an alternative weighting rule designed to favour value and quality characteristics, attempting to capture a systematic return advantage that conventional, cap-weighted indexes miss.

What the fund tracks

FDTS holds approximately 300 to 400 stocks across the developed markets outside the United States, focusing on companies with market capitalizations in the small-cap range. The fund’s universe includes countries such as the United Kingdom, France, Germany, Japan, Switzerland, Australia, and Canada — economies with mature equity markets and deep investor participation.

The distinguishing feature of FDTS is not what it owns but how it weights what it owns. Rather than using pure market capitalization (the standard approach in index funds), the fund applies the AlphaDEX methodology, which screens for stocks exhibiting value and quality characteristics. The intent is to capture systematic return premiums that academic research and practitioners associate with companies trading at discounts to fundamentals and demonstrating financial strength, rather than simply following the largest companies by market value. This approach can result in a portfolio that looks materially different from a conventional small-cap developed-markets index.

The fund’s strategy and structure

FDTS is a traditional, unleveraged equity ETF. It holds actual securities rather than derivatives, and it does not employ leverage, inverse exposure, or daily rebalancing mechanics. The fund tracks an index maintained by NASDAQ, and First Trust Advisors manages it with the objective of tracking the index’s return before costs.

Small-cap stocks in developed markets outside the United States tend to have lower daily trading volume and less analyst coverage than large-cap counterparts, which means FDTS may be suitable only for investors with longer time horizons who are comfortable holding through periods of heightened volatility or wider bid-ask spreads.

The geographic constraint — developed markets only, excluding the United States — means the fund has no exposure to emerging markets or the concentrated risks (or opportunities) of developing economies. For a global small-cap allocation, investors would typically pair this fund with a domestic or emerging-markets complement.

Cost, liquidity, and who it serves

FDTS has a modest expense ratio, in line with First Trust’s cost-conscious approach to index-tracking products. Because it is tied to a specific index maintained by NASDAQ, the index methodology itself is defined and transparent — the rules for what qualifies as value and quality are published and mechanically applied.

Liquidity in FDTS itself is generally adequate for typical portfolio-sized positions, though it will not have the same tight spreads as much larger ETFs focused on broad developed markets. The fund is best suited to disciplined, buy-and-hold investors seeking international small-cap equity exposure without paying active-management fees, and who are willing to accept the smaller trading volume that comes with a specialized geographic and size niche.

Investors should confirm the current components and methodology by consulting the fund’s prospectus and the underlying NASDAQ AlphaDEX index documentation.

Research and due diligence

Investors interested in FDTS should start with the fund’s fact sheet and prospectus (available from First Trust’s website), which detail the AlphaDEX methodology, the current top holdings, and the expense ratio. The prospectus also explains the fund’s rebalancing schedule and any restrictions on eligibility for securities to be included.

Understanding the AlphaDEX philosophy — what qualifies as value or quality in the fund’s universe — is essential, because it drives which stocks end up in the portfolio and how heavily they are weighted. Academic research on factor investing and value and quality premia can provide context for how these systematic approaches have historically performed, though past returns do not guarantee future results.

The underlying index is rebalanced regularly to maintain its quality and value tilt, so the holdings change periodically rather than remaining static. Investors should monitor whether the fund’s performance aligns with their expectations and keep an eye on the turnover rate, which affects tax efficiency and trading costs.