What is FDTS? (Pros, Cons, and Strategies)
If you're looking to diversify your investment portfolio beyond the U.S. market, FDTS (First Trust Developed Markets ex-US Small Cap AlphaDEX Fund) offers an intriguing opportunity. This ETF focuses on small-cap stocks from developed markets excluding the United States, providing a unique avenue for growth by tapping into the dynamism of smaller companies in established economies.
In this blog post, we will explore what FDTS is, along with its advantages and disadvantages.
What is FDTS?
FDTS is an ETF that seeks to provide targeted access to small-cap stocks in developed markets outside of the United States. FDTS stands for First Trust Developed Markets ex-US Small Cap AlphaDEX Fund.
FDTS follows the Nasdaq AlphaDEX Developed Markets ex-US Small Cap Index, which aims to capitalize on small-cap companies that show potential for high returns, utilizing a fundamentally driven quantitative model to identify stocks for inclusion.
Key Features of FDTS
- Focuses exclusively on small-cap companies in developed markets excluding the U.S.
- Utilizes a proprietary AlphaDEX stock selection methodology
- Stocks selected are expected to exhibit growth potential based on rigorous fundamental screening criteria such as price momentum, sales growth, and return on assets
By leveraging the AlphaDEX methodology, FDTS aims to outperform traditional market-cap weighted indices, offering investors a unique approach to international small-cap equity exposure.
FDTS Composition
FDTS comprises a diverse range of small-cap companies from various developed markets such as Japan, the United Kingdom, and Canada. The fund is well-diversified across various sectors, including industrials, consumer discretionary, and information technology, seeking to capture growth across different economic segments.
Pros of FDTS
Diversification into International Markets
FDTS allows investors to gain exposure to small-cap companies from countries outside the United States, which can help diversify the risk associated with a predominantly U.S.-based portfolio. International diversification is crucial for reducing geographical risk and tapping into growth opportunities in global markets.
Potential for High Growth
Small-cap stocks typically offer higher growth potential compared to their large-cap counterparts. FDTS focuses on this segment in developed markets, where economies are stable, and corporate governance practices are strong, increasing the likelihood of capturing substantial growth.
Unique AlphaDEX Methodology
The AlphaDEX stock selection model used in FDTS implements a rigorous quantitative approach to select stocks likely to outperform based on multiple fundamental factors. This method aims to construct a portfolio that can potentially deliver higher returns compared to traditional index approaches.
Cons of FDTS
Higher Volatility
Small-cap stocks tend to be more volatile than large-cap stocks. While the potential for higher returns exists, this volatility can lead to more significant price swings, posing a higher risk for investors.
Currency Risk
Since FDTS invests in companies outside the United States, investors are exposed to currency risk. Fluctuations in foreign exchange rates can impact the returns on investment, adding another layer of risk to consider.
Higher Expense Ratio
Compared to some other ETFs, FDTS has a relatively higher expense ratio. This could eat into the potential returns over the long term, making it a costlier investment option.
FDTS Investment Strategies
FDTS is designed for investors looking to diversify their portfolios by including international small-cap stocks. Its unique stock selection methodology and focus on developed markets offer distinct advantages but come with specific considerations.
Long-term Investment Strategy
Given the potential for high growth and higher risk associated with small-cap stocks, a long-term investment horizon is recommended for FDTS. Allowing sufficient time can help smooth out the volatility and maximize the growth potential of small-cap stocks.
Emphasize Diversification
Investors should consider using FDTS as part of a broader diversified portfolio. Combining FDTS with other asset classes and geographical exposures can help manage overall portfolio risk while still benefiting from the growth opportunities in international small-cap stocks.
Regular Rebalancing
Due to the inherent volatility and varying growth rates of small-cap stocks from different international markets, regular portfolio rebalancing is essential. This helps maintain the desired asset allocation and risk profile over time.
Monitor Currency Trends
Since currency risk is a significant consideration, staying attuned to trends in foreign exchange rates can be advantageous. Investors might consider hedging strategies or complementary investments to mitigate currency risk.
Conclusion
FDTS offers a unique investment opportunity through its focus on small-cap stocks in developed markets excluding the U.S. The AlphaDEX methodology provides a structured approach to stock selection, aiming to uncover high-growth potential opportunities.
While FDTS comes with higher volatility and currency risks, its diversification benefits and growth prospects make it an attractive option for long-term investors seeking international exposure in their portfolios. Evaluate your investment goals and risk tolerance to decide if FDTS aligns with your financial strategy.