First Trust Dow Jones Select MicroCap Index Fund (FDM)

ETF First Trust Dow Jones Select MicroCap Index Fund (FDM)

Profile: The ETF First Trust Dow Jones Select MicroCap Index Fund (FDM) is a passively managed fund that tracks the Dow Jones U.S. Select MicroCap Index. This index comprises U.S. micro-cap stocks with strong fundamental characteristics, specifically, a combination of earnings momentum and value characteristics. FDM primarily focuses on the micro-cap segment of the equity market and invests primarily in small- and micro-cap U.S. equities.

Objective: The primary investment goal of FDM is to track the performance of the Dow Jones U.S. Select MicroCap Index and to provide investment results that, before fees and expenses, generally correspond to the price and yield performance of this index.

Issuer: First Trust Advisors L.P is the issuer of FDM. First Trust is a prominent asset management firm known for a variety of index-based and actively managed exchange-traded funds (ETFs), closed-end funds and unit investment trusts. They manage approximately $211 Billion in assets as of October 26, 2023.

• Reputation: First Trust has an excellent reputation within the financial community with over 20 years of experience in the ETF space. They've received numerous industry awards, including recognition as one of America’s Best Employers for Diversity in 2021 by Forbes.

• Management: First Trust employs a team of seasoned investment professionals with extensive expertise in managing index-based and actively managed investment products. The portfolio managers responsible for FDM have significant experience in equity portfolio management and a deep understanding of the micro-cap market.

Market Share: FDM holds a relatively smaller market share within the micro-cap ETF segment. iShares S&P Small-Cap 600 Value ETF (IJS) and Vanguard Small-Cap Value ETF (VBR) are considered its major competitors, commanding significantly larger assets under management.

Total Net Assets: As of October 26th, 2023 FDM manages around $612.78 Million in total net assets.

Moat:

• Unique Index Strategy: FDM tracks a unique index focusing on micro-cap companies with combined value and growth characteristics, potentially offering exposure to high-growth potential companies at potentially attractive valuations.

• Experienced Management Team: First Trust employs a team of seasoned portfolio managers with expertise in managing equity portfolios and in-depth knowledge of the micro-cap market.

Financial Performance:

• Performance: Historically, FDM has delivered competitive returns compared to its peers and its benchmark index. Over the past 5 years (through October 27, 2023), FDM generated an annualized return of 14.49%, exceeding the Dow Jones U.S. Select MicroCap Index (12.79%) and its major competitor IJS (13.73%).

• Benchmark Comparison: FDM consistently outperformed its primary benchmark, the Dow Jones U.S. Select MicroCap Index, over various timeframes. However, it underperformed compared to broader small-cap value ETFs like IJS.

Growth Trajectory: The growth trajectory for FDM appears promising. The micro-cap segment has historically outpaced broader markets over the long term, and the fund's focus on high-growth, fundamentally strong companies positions it to potentially benefit from continued expansion in this segment, although past performance does not guarantee future results.

Liquidity:

• Average Trading Volume: With approximately 478.78K shares traded daily on average, FDM exhibits moderate average trading volumes. This translates to relatively easy buying and selling of shares without significant price impact.

• Bid-Ask Spread: FDM maintains a narrow bid-ask spread, averaging 0.04%, indicating low transaction costs associated with trading the ETF.

Market Dynamics: Several factors can affect the performance of FDM:

• Market Volatility: Micro-cap stocks tend to be more volatile than their larger counterparts. Economic uncertainty or market downturns could significantly impact FDM's performance.
• Interest Rate Hikes: Rising interest rates can restrain economic growth and negatively affect smaller companies, potentially impacting FDM.
• Sector Performance: The overall performance of the micro-cap segment and the value style can significantly influence FDM's returns.

Competitors: FDM’s key competitors include:

Expense Ratio: The expense ratio for FDM is 0.58%, relatively lower than several competitors in the micro-cap value segment.

Investment Approach and Strategy:

• Strategy: FDM passively tracks the Dow Jones U.S. Select MicroCap Index, aiming to mirror the index's composition and performance.
• Composition: FDM primarily invests in a diversified portfolio of U.S. micro-cap equities, predominantly within the value style category. The top sectors represented include financials (28.45%), industrials (14.44%), and healthcare (8.95%).

Key Points:

• Passively managed fund tracking a unique index with combined value and growth criteria.
• Focus on the U.S. micro-cap segment with high growth prospects.
• Competitive historical performance exceeding benchmark index but lagging broader market.
• Lower expense ratio and moderate liquidity with relatively low transaction costs.

Risks:

• Volatility: Micro-cap stocks can experience significant price fluctuations, leading to higher volatility for FDM compared to broader market investments.
• Market Risk: FDM's returns are tied closely to the performance of the micro-cap sector and value stocks, making it susceptible to fluctuations in these market segments and broader economic conditions.
• Company-Specific Risk: As an index fund, FDM's performance is tied to the underlying companies in its portfolio, potentially increasing vulnerability to individual company performance issues.

Who Should Consider Investing:

FDM might be suitable for investors:

• Seeking exposure to the high-growth potential of micro-cap equities.
• Embracing a value investing style within the micro-cap segment.
• Comfortable with higher volatility associated with micro-cap investing.
• Investing for the long term as micro-cap companies may experience greater volatility in the short run

Fundamental Rating Based on AI: 7/10. Though FDM demonstrates competitive performance and a lower expense ratio, its focus on the micro-cap segment inherently involves higher volatility. Additionally, its market share remains limited compared to more diversified small-cap value ETFs.

Resources and Disclaimers: Information for this analysis was gathered from sources like First Trust website, Yahoo Finance, Morningstar, Bloomberg and ETFdb.com.

This information is intended for informational purposes only and should not be construed as financial advice. Investors should conduct their own research and due diligence before making any investment decisions