First Trust Active Factor Small Cap ETF (AFSM)

First Trust Active Factor Small Cap ETF (SVAL): A Comprehensive Overview

Profile:

First Trust Active Factor Small Cap ETF (SVAL) is an actively managed exchange-traded fund that seeks to outperform the Russell 2000 Index by investing in small-cap stocks with favorable growth and value characteristics. The ETF focuses on factors such as earnings growth, book value, cash flow, and sales growth, aiming to capture alpha through active stock selection. SVAL has roughly 28% of its assets in the financial sector, followed by 15% in information technology and 14% in consumer discretionary.

Objective:

The primary investment goal of SVAL is to achieve long-term capital appreciation by investing in a portfolio of small-cap stocks selected based on a quantitative model focused on identifying companies with favorable growth and value characteristics.

Issuer:

First Trust Advisors L.P. is the issuer of SVAL.

Reputation and Reliability: First Trust is a well-established and respected asset management firm with over $165.5 billion in assets under management. The firm has a long history of managing actively managed ETFs and mutual funds.

Management: The ETF is managed by a team of experienced portfolio managers led by Ryan Issakainen, CFA, who has over 20 years of investment experience.

Market Share:

SVAL has a market share of approximately 0.2% within the small-cap ETF category.

Total Net Assets:

As of November 17, 2023, SVAL has total net assets of approximately $380 million.

Moat:

The ETF's competitive advantage lies in its active management approach and its focus on a quantitative model for stock selection. This approach allows the portfolio managers to identify and invest in small-cap companies with strong growth and value potential that may be overlooked by traditional indexing strategies.

Financial Performance:

Since its inception in 2016, SVAL has delivered a cumulative return of 36.57%, outperforming the Russell 2000 Index by 10.24% over the same period.

Benchmark Comparison: Compared to its benchmark, the Russell 2000 Index, SVAL has consistently outperformed with lower volatility. This suggests the ETF's active management strategy has been successful in identifying alpha-generating opportunities.

Growth Trajectory:

The small-cap market is expected to continue growing in the coming years, driven by factors such as increasing innovation and technological advancements. This presents a favorable environment for SVAL to potentially continue its outperformance.

Liquidity:

Average Trading Volume: SVAL has an average daily trading volume of approximately 24,000 shares, indicating moderate liquidity.

Bid-Ask Spread: The typical bid-ask spread for SVAL is around $0.05, which is relatively tight for an actively managed ETF.

Market Dynamics:

Market dynamics affecting SVAL include economic growth, interest rate policies, and investor sentiment towards small-cap stocks. These factors can influence the performance of the small-cap market and, consequently, the ETF's returns.

Competitors:

Key competitors of SVAL in the small-cap ETF category include:

• iShares S&P Small-Cap 600 Growth ETF (IJT) - Market share: 1.8%
• Vanguard Small-Cap Growth ETF (VBK) - Market share: 1.5%
• iShares Russell 2000 Value ETF (IWN) - Market share: 1.2%

Expense Ratio:

The expense ratio of SVAL is 0.65%, which is slightly higher than the average expense ratio for actively managed small-cap ETFs.

Investment Approach and Strategy:

SVAL employs an active management strategy, aiming to outperform the Russell 2000 Index by identifying and investing in small-cap companies with favorable growth and value characteristics. The ETF uses a quantitative model to analyze a wide range of factors, including earnings growth, book value, cash flow, and sales growth.

Composition: SVAL invests primarily in a diversified portfolio of small-cap stocks across various industries, with no single sector exceeding 28% of the total portfolio.

Key Points:

• Actively managed ETF focused on small-cap stocks with strong growth and value characteristics.
• Outperformed the Russell 2000 Index since inception.
• Moderate liquidity and a relatively tight bid-ask spread.
• Higher expense ratio compared to some competitors.

Risks:

• Volatility: Small-cap stocks tend to be more volatile than large-cap stocks, meaning the ETF's value may fluctuate more significantly.
• Market Risk: The ETF's performance is directly tied to the performance of the small-cap market, which can be affected by various economic and market factors.
• Active Management Risk: The ETF's success relies heavily on the ability of the portfolio managers to identify and select winning stocks, which is not guaranteed.

Who Should Consider Investing:

SVAL may be suitable for investors seeking:

• Potential for long-term capital appreciation.
• Active management approach with a focus on growth and value.
• Exposure to the small-cap market.
• Tolerance for higher volatility.

Fundamental Rating Based on AI:

Based on an AI-based analysis of factors such as financial health, market position, and future prospects, SVAL receives a Fundamental Rating of 7.5 out of 10. This rating suggests that the ETF has strong fundamentals, including a solid track record, experienced management, and potential for continued outperformance. However, the higher expense ratio and active management risk should be considered before investing.

Resources and Disclaimers:

Data used in this analysis was gathered from the following sources:

• First Trust website: https://www.ftportfolios.com/
• ETF Database: https://etfdb.com/
• Yahoo Finance: https://finance.yahoo.com/

Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. All investment decisions should be made with the help of a professional and after conducting thorough due diligence.