By Michael Johnston:
First Trust launched two more international AlphaDEX ETFs this week, on the heels of the debut of seven country-specific funds that employ the proprietary stock selection methodology [see AlphaDEX ETFdb Portfolio]. The new ETFs will offer broad exposure to emerging and developed markets outside the U.S., focusing specifically on small cap stocks in those segments:
- Emerging Markets Small Cap AlphaDEX Fund (NYSEArca:FEMS - News)
- Developed Markets ex-U.S. Small Cap AlphaDEX Fund (NYSEArca:FDTS - News)
Last year, First Trust debuted ETFs targeting these same markets that generally focus on larger companies. The First Trust Emerging Markets AlphaDEX (:FEM) has assets of about $43 million, while the Developed Markets ex-U.S. AlphaDEX Fund (:FDT) has about $33 million. Both of those ETFs started trading in April 2011.
Under The Hood
FEMS is linked to the Defined Emerging Markets Small Cap Index, a benchmark that selects small cap emerging markets stocks based on their score on a variety of value and growth metrics. Currently, the underlying index has a tilt towards emerging Asian economies; China (28%) and Taiwan (25%) make up the largest individual country allocations. Also receiving allocations of more than 5% in the portfolio are Thailand, Turkey, Indonesia, and Malaysia [see FEMS Fact Sheet].
From a sector perspective, FEMS maintains a nice balance. Five sectors–consumer discretionary, financials, industrials, technology, and materials–receive an allocation between 15% and 20% in the underlying index. The smallest weights are afforded to telecoms and health care; those two sectors make up less than 3% of assets.
FDTS is linked to the Defined Developed Markets Ex-US Small Cap Index, a benchmark that includes almost 400 small cap stocks from a number of developed markets outside the U.S. (but including Canada). The median market cap for the index underlying this ETF is just $600 million; by comparison, FDT has a median market cap of about $4.5 billion.
This ETF also has an Asian tilt; FDTS makes its largest country allocations to Japan (26%), Hong Kong (13%), and South Korea (13%). Other countries afforded weights of 5% or more include Canada, the UK, and France. FDTS gives the largest sector allocation to financials (22%), followed by industrials (16%) and consumer discretionaries (15%). Towards the underweight end of the spectrum are health care (2%) and telecom (3%) [see FDTS Fact Sheet].
Both of the new ETFs will charge an expense ratio of 0.80%. By comparison, the SPDR S&P Emerging Markets Small Cap ETF (:EWX) charges 0.65%. The Schwab International Small Cap Equity ETF (:SCHC) charges just 0.35%.
Disclosure: No positions at time of writing.
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