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

If you're keen on diversifying your investment portfolio with a focus on large-cap value stocks, the First Trust Large Cap Value AlphaDEX Fund (FTA) is an option worth considering. In this post, we'll explore what FTA is, its advantages and disadvantages, and effective strategies for investing in this ETF.

What is FTA?

The First Trust Large Cap Value AlphaDEX Fund (FTA) is an exchange-traded fund (ETF) that invests in large-cap value stocks within the U.S. market. Unlike traditional market-cap weighted indices, FTA follows the Nasdaq AlphaDEX Large Cap Value Index which employs a modified equal-weighting approach and other proprietary methodologies to select stocks.

Key Features of FTA

  • Fundamental Selection: Stocks are chosen based on various growth and value factors.
  • Modified Equal Weighting: Unlike cap-weighted indices, FTA uses modified equal weighting to avoid over-concentration in the largest companies.
  • Wide Reach: Includes stocks from the S&P 500 and other large-cap indices which fit the value criteria.

This combination of fundamental analysis and equal weighting helps to provide a diversified exposure to large-cap stocks that are undervalued.

FTA Composition

FTA holds a diverse array of large-cap companies from various sectors such as finance, healthcare, consumer services, and more. This diversification helps in mitigating sector-specific risks while targeting undervalued stocks that have the potential for capital appreciation.

Pros of FTA

Diversification

One of the standout benefits of FTA is diversification across sectors. By holding a mix of companies from various industries, FTA minimizes the impact of a downturn in any single sector.

Modified Equal Weighting

The modified equal-weighting approach helps reduce the concentration risk inherent in cap-weighted indices. This ensures that the performance of the ETF isn't overly reliant on a few large-cap stocks.

Fundamental Selection

The AlphaDEX methodology leverages detailed fundamental analysis to choose stocks that are undervalued but have the potential for growth. This can offer a better risk-reward balance compared to traditional large-cap value ETFs.

Capital Appreciation Potential

Through a combination of value and growth factors in the stock-selection process, FTA aims to achieve capital appreciation along with the dividends offered by large-cap value stocks.

Cons of FTA

Higher Expense Ratio

FTA has a relatively higher expense ratio compared to index ETFs, standing at around 0.59%. This can eat into returns over the long term, especially when compared to lower-cost options.

Volatility

Even though FTA invests in large-cap stocks, the modified equal-weighting approach can result in higher volatility compared to traditional market-cap weighted indices. This could make FTA less appealing for risk-averse investors.

Complex Methodology

The proprietary stock-selection process can be less transparent compared to other traditional index methodologies, making it challenging for investors to fully understand the underlying criteria and risks involved.

FTA Investment Strategies

Long-term Investment Strategy

Given its focus on undervalued large-cap stocks, FTA is more suited for long-term investors who can weather short-term market fluctuations. Investing for a period of at least 5-10 years can help you capitalize on both the dividend income and potential capital appreciation.

To effectively invest in FTA:

  • Regular Contributions: Consider dollar-cost averaging (DCA) to mitigate the impact of market volatility.
  • Reinvest Dividends: Reinvesting dividends can accelerate the growth of your investment portfolio through compounding.

Diversification Strategy

Considering the higher volatility, FTA can be used as part of a diversified portfolio rather than the sole investment. Combining FTA with other ETFs that target different sectors or asset classes can help balance the portfolio's risk and return.

Tactical Allocation

For those who engage in active portfolio management, FTA can serve as a tactical allocation towards large-cap value stocks when they appear undervalued compared to the broader market. This approach requires regular portfolio reviews and rebalancing based on market conditions.

Conclusion

The First Trust Large Cap Value AlphaDEX Fund (FTA) offers a unique blend of diversification, fundamental stock selection, and modified equal weighting, making it a compelling option for long-term, value-focused investors. While it has some drawbacks like a higher expense ratio and potential volatility, these are offset by its strategic benefits if used correctly within a diversified portfolio.

By understanding the pros and cons and adopting effective investment strategies, you can make FTA work for your financial goals. Whether you're preparing for retirement or looking to add a value tilt to your portfolio, FTA provides a well-rounded approach for discerning investors.

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