First Trust Dow Jones Select MicroCap Index Fund

FDM

Market cap $211M

Designed to provide broad exposure to the Small Cap Blend segment of the US equity market, the First Trust Dow Jones Select MicroCap ETF (FDM) is a passively managed exchange traded fund launched on September 27, 2005.

Designed to provide broad exposure to the Small Cap Blend segment of the US equity market, the First Trust Dow Jones Select MicroCap ETF (FDM) is a passively managed exchange traded fund launched on September 27, 2005.

FDM might lure investors with its 5.8% earnings yield, something that is quite complicated to find in today's high-priced market fluctuating around record highs. However, the reality of micro-cap investing is that large value exposure, sadly, translates into high-risk and low reward. This is the main consequence of the universe having inadequate quality. While FDM does address the quality issue in a diligent manner, which secured outperformance over its peer IWC since its inception, it has significantly underperformed IVV and IJR.

The recent sell-off in major US stock indices has been largely driven by broader macroeconomic factors. Value stocks may not be able to provide a hedge against undiversifiable risks.

Strong returns in U.S. stocks, particularly over the past two plus years, have led investors to question the relative lack of companies going public via the IPO process — as well as the potential implications for the IPO market in the long term. According to active equity managers, a combination of increased public market regulation, a reduced pipeline of potential offerings following the prior boom, the rising role of large private asset managers in capital raising, and near-term uncertainty surrounding government policy are all contributing factors. At Russell Investments, we think investors benefit from taking a long-term view.

Small-cap ETFs have been outperforming on optimism over Donald Trump's policies, which will likely result in faster economic growth.

FDM tracks the Dow Jones Select Microcap Index, selecting about 150 micro-cap stocks after applying profitability and value screens. Expenses are 0.60% and the ETF has $181 million in assets. These screens have proved valuable over the long run. Since 2005, it has outperformed the more popular and better diversified IWC with less risk. I expect this trend to continue. My analysis reveals FDM is superior on risk management, value, and quality, with a slight weakness on growth. Ultimately, it looks better prepared for multiple market conditions.