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

As the world of investment grows ever more complex, it becomes imperative to understand the various instruments at your disposal. One such instrument is the FNY, the First Trust Mid Cap Growth AlphaDEX Fund. This blog post will delve into what FNY is, its benefits and drawbacks, and effective strategies for investing in it.

What is FNY?

The First Trust Mid Cap Growth AlphaDEX Fund (FNY) is an exchange-traded fund that aims to provide investors with exposure to mid-cap growth stocks. Mid-cap stocks typically have market capitalizations between $2 billion and $10 billion, bridging the gap between small-cap and large-cap stocks.

FNY is built on a proprietary stock selection methodology known as the AlphaDEX methodology. Unlike traditional ETFs that follow a specific index, the AlphaDEX methodology ranks stocks based on various growth factors, ensuring that the fund focuses on quality growth stocks.

Key Features of FNY

• Targeted Mid-Cap Exposure: Focuses on mid-cap growth companies, ideal for capturing companies in the rapid growth phase.
• AlphaDEX Methodology: Utilizes a detailed ranking system to select stocks, emphasizing financial health and growth prospects.
• Diverse Sector Representation: Spreads investments across various sectors to reduce risk.

The AlphaDEX method involves selecting stocks based on criteria like earnings growth, sales growth, book value, and price-to-sales ratios. Stocks scoring the highest based on these criteria are included in the fund.

FNY Composition

FNY incorporates a broad spectrum of mid-cap growth stocks. The portfolio consists of companies from various sectors, including Information Technology, Healthcare, Consumer Discretionary, and Industrials. Examples of key holdings include companies like Tesla (TSLA), Etsy (ETSY), and Zoom Video Communications (ZM).

Pros of FNY

Potential for High Growth

One of the main attractions of FNY is its focus on mid-cap growth companies. Mid-cap stocks often exhibit significant growth potential as they are usually in an expansion phase. This can lead to outsized returns compared to large-cap stocks, which might be more stable but offer slower growth.

Diversified Exposure

FNY provides diversified exposure across multiple sectors, which helps mitigate the risk inherent in investing in individual stocks. This diversified approach can result in a more balanced portfolio that can weather sector-specific downturns.

Proprietary Selection Process

The AlphaDEX methodology ensures that only the top-ranked stocks based on several growth metrics are included in the fund. This can lead to better performance over time compared to traditional market-cap-weighted indices.

Moderate Expense Ratio

Though not the lowest in the ETF space, FNY offers a competitive expense ratio of 0.70%. This is moderate, particularly given the active, research-driven selection process employed by the fund.

Cons of FNY

Higher Volatility

Mid-cap growth stocks can be more volatile than their large-cap counterparts. This means that while the potential for higher returns exists, so does the potential for larger drawdowns during market corrections.

Sector Concentration Risk

While FNY aims for diversified exposure, it can sometimes become overweight in sectors that are experiencing growth spurts. This concentration can present risks if those sectors face downturns.

Active Management Costs

Although the expense ratio is moderate, it is higher than some passive ETFs. Investors must weigh whether the potential for higher returns justifies the additional cost.

FNY Investment Strategies

Long-term Growth Strategy

For those with a long-term horizon, investing in FNY can be an excellent way to harness the growth potential of mid-cap stocks. Aimed at growth rather than income, FNY could be particularly beneficial for investors looking to build wealth over a 10-year or longer period.

Due to its growth-oriented nature, it is advisable to hold FNY for extended periods to ride out the volatility and capitalize on the growth of mid-cap stocks.

Dollar-Cost Averaging

Investing a fixed amount of money at regular intervals can help mitigate the impact of market volatility. By adopting a dollar-cost averaging strategy, you can reduce the emotional burden of market timing and potentially lower the average cost of your investments over time.

Diversify with Complementary ETFs

While FNY offers mid-cap growth, consider diversifying your portfolio with ETFs that focus on other segments, such as large-cap value, international stocks, or bonds. This can help you create a balanced portfolio that can weather various market conditions.

Conclusion

FNY, the First Trust Mid Cap Growth AlphaDEX Fund, provides a compelling avenue for investors looking to capitalize on the growth potential of mid-cap stocks. With its proprietary AlphaDEX methodology, diversified exposure, and moderate expense ratio, FNY stands out as a robust option for long-term growth investors. However, it is crucial to be mindful of its higher volatility and potential sector concentration risks. By employing strategies like long-term holding and dollar-cost averaging, you can maximize the benefits and mitigate the drawbacks of investing in FNY.