First Trust Emerging Markets AlphaDEX Fund (FEM)

The First Trust Emerging Markets AlphaDEX Fund (ticker FEM) is an exchange-traded fund that buys stocks in emerging markets — fast-growing, developing economies like India, Brazil, Mexico, and Poland. Instead of buying stocks based on their size (the way most funds do), FEM uses a different approach: it picks stocks that look undervalued and financially healthy compared to their peers, then weights them equally across the portfolio.

What emerging markets are and why people invest in them

Emerging markets are countries whose economies are growing quickly but are not yet as wealthy or stable as the United States or Western Europe. Think of nations like India, Brazil, Vietnam, and Poland. Their companies can be great investments because the economies are expanding, wages are rising, and more people are getting jobs and buying goods. The stock markets in these countries can move faster (and more dramatically) than mature markets, which means bigger potential gains but also bigger potential losses.

FEM gives you a way to own a slice of hundreds of companies across these emerging markets without having to buy each stock individually. Instead of betting on one country or one company, you get diversification across many countries and many different industries.

How FEM picks stocks

Most funds that invest in emerging markets just buy the biggest companies in each country, because that is simple and cheap to do. FEM does something different. Its computers screen thousands of emerging-market stocks to find ones that meet two criteria: they look cheap (trading at low prices compared to their earnings and book value), and they are financially solid (not drowning in debt, making steady profits).

Once those stocks are identified, FEM gives each one equal weight — that is, the same amount of money — rather than letting the biggest companies dominate the fund. This means a smaller, cheaper stock has the same influence on the fund as a bigger, pricier one. This approach is based on the idea that cheaper, quality stocks tend to do better over long periods, even though nobody can predict which specific stocks will win.

Who invests in FEM and why

People invest in FEM because they think emerging markets will grow faster than mature economies over the next decade or more. Emerging-market companies often have younger, faster-growing customer bases and expanding opportunities. If that bet is right, FEM could deliver strong returns.

The tradeoff is volatility. Emerging-market stocks bounce around more than American or European stocks. A bad day in Beijing or a political change in Brazil can send the whole fund down sharply. And because FEM is picking specific stocks based on value and quality, it can perform differently than a simple index fund that just holds every major emerging-market company proportional to its size.

The real risks and costs

Emerging markets come with extra risks that developed markets do not have. Governments can change policies suddenly. Currency values can swing dramatically, which matters if FEM’s holdings are paid in rupees or Brazilian reals but you spend money in dollars. Some stocks have less trading volume, so it can be harder to buy or sell shares without moving the price. And some countries have lower accounting standards, so it is harder to know exactly what a company’s financial statements mean.

FEM charges a fee (an expense ratio) that is slightly higher than a fund tracking a simple index, because the NASDAQ AlphaDEX methodology requires more work to implement. For most investors, the fee is still quite modest, but it is worth knowing about.

How to think about whether FEM is right for you

FEM is a long-term holding. If you are saving for retirement decades away, or if you want emerging-market exposure as part of a diversified portfolio, it makes sense. If you are going to panic and sell the moment the fund drops 20 percent in a bad market, FEM is not right for you.

You should read the fund’s fact sheet (available on First Trust’s website) to see which countries and which industries the fund is investing in. You can also look at the prospectus to understand exactly how the NASDAQ AlphaDEX methodology works. If you are interested in emerging markets but want a simpler approach, other funds just buy all the big emerging-market stocks in equal weight or size weight. There is no single right answer, but FEM is one honest way to get emerging-market exposure without paying an active manager to pick stocks.