What is FNX? (Pros, Cons, and Strategies)

When looking to diversify your investment portfolio, mid-cap stocks offer a compelling option. One of the noteworthy ETFs in this category is FNX, the First Trust Mid Cap Core AlphaDEX Fund. As investors seek balanced growth and stability, FNX stands out due to its unique stock selection strategy. In this blog post, we will explore what FNX is, along with its advantages, disadvantages, and various investment strategies.

What is FNX?

FNX, or the First Trust Mid Cap Core AlphaDEX Fund, is an ETF designed to invest in U.S. mid-cap stocks. Unlike traditional ETFs that follow market cap-weighted indices, FNX employs the AlphaDEX methodology, which aims to select stocks based on various growth and value factors to outperform the broader market.

Key Features of FNX

• AlphaDEX Methodology: Uses a unique stock selection process based on growth and value factors.
• Mid Cap Focus: Targets mid-cap companies, which are typically defined as those with market capitalizations between $2 billion and $10 billion.
• Quarterly Rebalancing: Adjusts its holdings every quarter to ensure alignment with the AlphaDEX criteria.

The AlphaDEX methodology ranks stocks according to multiple factors such as earnings growth, price appreciation, sales-to-price ratio, and cash flow to price. The top-ranked stocks are then included in the ETF.

FNX Composition

FNX comprises a broad array of U.S. mid-cap stocks selected through its proprietary AlphaDEX methodology. The fund is diverse, spanning various sectors, including technology, healthcare, industrials, and consumer discretionary, among others. Unlike typical market cap-weighted indices, FNX weights its holdings based on their AlphaDEX scores, thus providing a unique composition.

Pros of FNX

Diversified Exposure

FNX provides diversified exposure to mid-cap stocks, which can offer a balance between the stability of large-cap stocks and the growth potential of small-cap stocks. This makes FNX a versatile addition to various investment portfolios.

Potential for Outperformance

The AlphaDEX methodology aims to identify stocks with superior growth and value characteristics. As a result, FNX has the potential to outperform traditional market cap-weighted mid-cap indices, offering higher returns for investors.

Regular Rebalancing

FNX rebalances its holdings quarterly, ensuring that the fund stays aligned with its growth and value criteria. This constant readjustment can help maintain the fund's objective of outperforming the broader market.

Cons of FNX

Higher Expense Ratio

FNX has a higher expense ratio compared to some traditional ETFs. The yearly expense ratio for FNX is approximately 0.61%. While this fee supports the more complex AlphaDEX methodology, it may be a deterrent for cost-conscious investors.

Volatility

Mid-cap stocks generally exhibit higher volatility than large-cap stocks. As FNX focuses on mid-cap companies, investors should be prepared for this increased level of fluctuation.

Performance Risk

While the AlphaDEX methodology aims to outperform, there is no guarantee it will achieve this goal. Market conditions and the performance of mid-cap stocks can significantly impact FNX's returns.

FNX Investment Strategies

FNX's unique approach and focus on mid-cap stocks make it suitable for a variety of investment strategies. Here are some approaches to effectively incorporate FNX into your portfolio.

Long-term Growth Strategy

FNX is ideal for investors seeking long-term growth. The blend of growth and value factors in its selection process aims to provide higher returns over an extended period. A long-term investment of at least 5 to 10 years could allow investors to benefit from the growth potential of mid-cap stocks while mitigating short-term volatility.

Diversification Strategy

Adding FNX to a diversified portfolio can balance the risk and return profile. Given its focus on mid-cap stocks, FNX can complement investments in large-cap and small-cap funds, providing broader market exposure.

Quarterly Adjustment Strategy

Take advantage of FNX's quarterly rebalancing by reviewing your holdings each quarter. This practice can help ensure your investment portfolio remains aligned with your long-term financial goals and risk tolerance.

Combining with High-Dividend ETFs

While FNX aims for capital growth, combining it with high-dividend ETFs can create a balanced investment portfolio. This combination provides the potential for both growth and a steady income stream.

Conclusion

FNX, the First Trust Mid Cap Core AlphaDEX Fund, provides a unique approach to mid-cap investing through its AlphaDEX methodology. With a diversified portfolio of mid-cap stocks and a focus on both growth and value factors, FNX offers potential for long-term growth. However, investors should be mindful of its higher expense ratio and inherent volatility. By utilizing suitable investment strategies, FNX can be a valuable component of a diversified investment portfolio, balancing risk and return while aiming for market outperformance.