What is FAD? (Pros, Cons, and Strategies)
When planning for diversified, long-term investment strategies, mutual fund ETFs often come into play. One interesting option is the First Trust Multi Cap Growth AlphaDEX Fund, commonly known as FAD. This ETF is designed to provide investors with growth opportunities across various market caps through a unique stock selection methodology. Let's dive into what FAD is, its advantages and disadvantages, and strategic ways to invest in it.
What is FAD?
FAD is the ticker symbol for the First Trust Multi Cap Growth AlphaDEX Fund. This ETF aims to generate growth by using a quantitative selection process to include a diverse mix of companies across different market caps—small, medium, and large.
FAD utilizes the AlphaDEX selection methodology, which screens stocks based on multiple growth factors like price appreciation, sales to price ratio, and operating cash flow to price ratio. The fund seeks to outperform traditional, market-cap-weighted ETFs by using this multifactor approach.
Key Features of FAD
- Broad Exposure to Growth Stocks: FAD invests in a diverse range of growth stocks across small, mid, and large cap categories.
- Quantitative Stock Selection: The AlphaDEX methodology uses various growth factors to filter and rank the stocks.
- Regular Rebalancing: The fund is rebalanced and reconstituted on a regular basis to ensure the portfolio remains aligned with the growth criteria.
FAD Composition
FAD includes companies from different sectors, reflecting a multi-cap approach. As of the last update, industries like technology, consumer discretionary, healthcare, and industrials have significant representation. The fund's holdings might include high-growth firms like Amazon (AMZN), Alphabet (GOOGL), and Adobe (ADBE), but the composition can change periodically due to the fund's rebalancing mechanism.
Pros of FAD
Diversified Growth Potential
FAD offers exposure to a diverse range of high-growth companies across various market cap sizes. This diversification can help mitigate risks associated with investing in a single sector or market cap.
Small and mid-cap companies often have faster growth rates compared to large caps but can also be more volatile. FAD balances this by including a mix of all three, potentially offering a blend of stability and growth.
Systematic Selection Process
The AlphaDEX methodology systematically selects stocks based on specific growth metrics. This reduces human biases and aims to include companies demonstrating strong fundamentals and potential for growth.
The algorithm looks at factors such as price appreciation, sales to price ratio, and operating cash flow to price ratio to find the best candidates, resulting in a portfolio that is theoretically better positioned for growth.
Regular Rebalancing
Regular rebalancing and reconstitution ensure that FAD maintains a portfolio of stocks that meet its growth criteria. This helps keep the ETF aligned with its growth-focused investment strategy and can adapt to market changes more dynamically than a static portfolio.
Cons of FAD
Higher Expense Ratio
One downside to FAD is its expense ratio. At 0.70%, it is higher than many other growth or multi-cap ETFs. Higher expense ratios can eat into returns over the long term, so it's something investors should keep in mind.
Volatility
Given its focus on growth stocks, FAD can be more volatile compared to other ETFs. Growth stocks, especially in the small and mid-cap categories, can experience significant price swings. This volatility can be a concern for risk-averse investors.
Lower Dividend Yields
FAD focuses on growth rather than income, meaning it typically offers lower dividend yields. Investors primarily seeking regular income through dividends may find other ETFs more suitable.
FAD Investment Strategies
FAD can play a crucial role in a diversified investment portfolio. However, the approach to investing in FAD should align with your financial goals and risk tolerance.
Long-term Growth Strategy
For those looking to achieve long-term growth, FAD can be a powerful component of your portfolio. The multifactor approach used by AlphaDEX aims to identify firms with sustainable growth prospects, which could result in substantial capital appreciation over time.
Balanced Portfolio Approach
Investing in FAD alongside other ETFs, including those focused on income or international markets, can provide a balanced investment strategy. This can help mitigate risks associated with any single sector or market cap.
Regular Contributions and Diversification
Consider allocating a portion of your regular investments to FAD. For example, setting up automatic monthly investments can take advantage of dollar-cost averaging. This strategy spreads your investment across different market conditions, potentially reducing the impact of volatility.
Reinvesting Gains
For maximizing returns, reinvest capital gains and any dividends from other portions of your portfolio into FAD. This can enhance the compounding effect and potentially increase the long-term growth of your investments.
Conclusion
FAD offers a unique multi-cap growth investment strategy through its quantitative stock selection process. While it provides diversified growth potential and systematic selection, it does come with higher volatility and expense ratios. By strategically investing in FAD with a long-term perspective and using a balanced portfolio approach, investors can potentially benefit from significant growth opportunities in various sectors and market caps.