First Trust Small Cap Growth AlphaDEX Fund (FYC)

The First Trust Small Cap Growth AlphaDEX Fund (FYC) is an exchange-traded fund that applies a proprietary stock-screening methodology to the small-cap growth segment of the equity market. It is designed to capture smaller companies that exhibit both strong relative momentum and growth characteristics, using a rules-based (not discretionary) approach to select and weight its holdings.

The AlphaDEX methodology and screening

AlphaDEX is a quantitative screening framework developed by Dorsey Wright. Rather than selecting individual stocks based on analyst judgment, AlphaDEX applies a mechanical set of rules to identify and rank candidates. The process combines relative-strength signals (how a stock has performed compared to its peers and the broader market) with growth-oriented factors such as earnings momentum, revenue trends, and other metrics that historically correlate with outperformance by growth stocks.

The output is an index of small-cap growth stocks that score highly on this combined screening. FYC tracks this index, meaning it holds all (or substantially all) of the qualifying stocks, weighted according to the index’s methodology. Because the selection is rules-based rather than discretionary, FYC is technically an index fund — it follows the AlphaDEX small-cap growth index rather than choosing stocks independently.

Why small-cap growth?

Small-cap stocks (those with modest market capitalizations) are less followed by Wall Street analysts and less efficiently priced than large-cap stocks, creating more opportunity for systematic screening processes to identify mispriced or overlooked opportunities. Growth stocks — those with rising earnings or revenue — have historically outperformed value stocks over long periods, particularly in bull markets.

The intersection of small-cap and growth segments offers a higher-risk, higher-potential-reward exposure compared to large-cap or dividend-heavy stocks. Investors in FYC are explicitly assuming that the additional volatility of small-cap growth is worth the expected long-term return.

Portfolio composition and rebalancing

FYC holds a diversified basket of small-cap growth stocks, typically numbering in the dozens. The basket is larger than that of a concentrated fund but still smaller than a comprehensive small-cap index. Each stock is weighted according to the AlphaDEX index methodology, which typically favors higher-ranked candidates but avoids extreme concentration.

The fund rebalances periodically as stocks’ relative-strength rankings and growth characteristics change. Some holdings may enter the index as their metrics improve; others exit as their relative strength fades. This ongoing turnover incurs trading costs, which are captured in the fund’s expense ratio.

Cost and trading characteristics

FYC charges an annual expense ratio to cover the costs of tracking the AlphaDEX index and rebalancing the portfolio. The exact rate depends on the current fund size, trading costs, and any changes to the expense structure; investors should verify this in the fund’s current prospectus or fact sheet.

The fund trades on an exchange with stock-like liquidity on normal trading days. Because it holds a diversified basket of small-cap stocks, liquidity can be tighter than for funds holding large-cap names, particularly in volatile markets when bid-ask spreads widen across the small-cap segment.

The risks specific to this fund

Small-cap stocks are inherently more volatile than large-cap stocks, and FYC concentrates on a subset of small-caps with growth characteristics — which amplifies volatility further. Market drawdowns often hit growth stocks harder than value stocks, and small-cap growth can experience severe losses during recessions or risk-off environments.

The AlphaDEX screening process is backward-looking: it identifies stocks that have recently demonstrated relative strength and growth metrics. This does not guarantee that those same stocks will continue to outperform. Markets can shift, and yesterday’s promising growth story can quickly disappoint.

Concentration risk in individual holdings is modest given the diversification across dozens of names, but the sector concentration can be high. If the screening process favors technology or biotech stocks (which is common in growth-oriented methodologies), the fund becomes implicitly biased toward those sectors’ fortunes.

How to research FYC

Start by reading the AlphaDEX index methodology documents, available through Dorsey Wright or First Trust. These explain the exact screening criteria, the weighting scheme, and the rebalancing frequency. Then examine the current holdings to see which sectors and companies the screening has identified.

Compare FYC’s returns to a broad small-cap growth index or small-cap benchmark over multiple periods (3, 5, and 10 years where available). Has the AlphaDEX approach delivered meaningful outperformance that justifies the fee relative to a passive small-cap growth fund?

Monitor the fund’s turnover and sector concentrations. High turnover may indicate that the index methodology is selecting and rotating through candidates frequently, which affects both costs and tax efficiency. Sector concentration reveals whether the fund is tilted toward particular industries that carry their own risks and rewards.