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

As the financial landscape continues to evolve, investors look for diversified and robust investment vehicles to meet their financial goals. Among such vehicles, the First Trust Large Cap Growth AlphaDEX Fund, also known as FTC, stands out for its growth-oriented approach. This blog post explores what FTC is, its advantages and disadvantages, and effective strategies for investing in it.

What is FTC?

FTC is an exchange-traded fund (ETF) that aims to deliver superior returns by focusing on large-cap growth stocks in the U.S. market. Unlike traditional ETFs that follow a market capitalization-weighted index, FTC employs a more nuanced, fundamentally weighted strategy to select and weight its holdings.

FTC seeks to generate substantial returns by focusing on growth stocks. This 'alpha' strategy is built on the concept that fundamentally strong stocks, characterized by favorable growth rates, valuations, and momentum, can outperform their counterparts in the long run.

Key Features of FTC

• Fundamentally Weighted: Unlike traditional ETFs, FTC uses a quantitatively-driven index strategy that selects stocks based on several fundamental factors, including sales growth, book value, price-to-sales ratio, and more.
• Focus on Large-Cap Growth: FTC primarily invests in large-cap growth stocks, typically companies with strong earnings growth potential.
• Diversified Portfolio: The fund includes a diversified range of sectors but has a high concentration in technology and consumer discretionary sectors, which are commonly associated with growth stocks.

FTC Composition

FTC includes prominent large-cap growth companies such as Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Tesla (TSLA). The fund is heavily weighted towards sectors typically associated with high growth, such as technology and consumer discretionary, thus aiming to capture substantial returns from the high potential of these companies.

Pros of FTC

Potential for High Returns

FTC's strategy of focusing on fundamentally strong growth stocks aims to offer high potential returns. By investing in companies expected to grow significantly in earnings and revenues, FTC positions itself as an ETF capable of outperforming the broader market, especially during bullish periods.

Diversification Across Growth Sectors

The fund offers diversification across several high-growth sectors, reducing the risk associated with investing in a single company or sector. Investors can gain exposure to a broad array of companies with substantial growth potential.

Research-Driven Selection

FTC employs a robust, quantitatively driven selection process that filters stocks based on fundamental factors. This method enhances the likelihood of investing in companies with strong growth outlooks and favorable financial metrics.

Cons of FTC

High Volatility

Growth stocks, by nature, are subject to high volatility compared to value stocks or income-focused ETFs. FTC's significant exposure to sectors like technology can result in greater price fluctuations, especially during market downturns or during a period of sector-specific challenges.

Higher Expense Ratio

FTC carries a higher expense ratio compared to other ETFs focused on large-cap stocks. With an expense ratio around 0.62%, it is higher than passively managed ETFs. While this is justified by its active selection process, it can be a downside for cost-conscious investors.

Sector Concentration Risks

FTC is heavily weighted towards technology and consumer discretionary sectors. A significant downturn or disruption in these specific sectors could adversely affect the fund's overall performance.

FTC Investment Strategies

Given the unique attributes and potential of FTC, investors should approach it with a clear strategy that aligns with their investment goals.

Long-Term Growth Strategy

FTC is a suitable option for investors with a long-term horizon, focusing on capital appreciation. Its concentration in growth sectors means it can benefit substantially in expansive economic periods. A long-term strategy allows investors to weather short-term volatility and capitalize on the growth trajectory of the underlying companies.

Dollar-Cost Averaging

One effective strategy is to utilize dollar-cost averaging (DCA) – investing a fixed amount regularly regardless of the ETF's price. This approach helps to mitigate the impact of market volatility and build a significant position in FTC over time, thus harnessing the potential for compounded growth.

Diversify Within the Portfolio

Although FTC offers diversification within growth sectors, investors should aim to balance their portfolio by including other asset classes or sectors. This can include bonds, value stocks, or international ETFs to provide stability and reduce overall portfolio risk.

Rebalancing

Regular portfolio rebalancing is crucial, especially for an ETF like FTC susceptible to high volatility. Periodic rebalancing ensures that the ETF's growth potential is leveraged while maintaining the desired risk level within the overall investment portfolio.

Conclusion

FTC stands as a compelling investment fund for those looking to capture high growth potential in the U.S. large-cap space. By focusing on fundamentally strong growth stocks, FTC presents an opportunity for sizable returns, albeit with higher volatility and expense ratios. Through strategic long-term investment, dollar-cost averaging, and maintaining a diversified portfolio, investors can optimize their gains and offset inherent risks. Consider your financial objectives and risk tolerance carefully before committing to FTC as part of your investment strategy.