The fund tracks the Nasdaq AlphaDEX Small Cap Growth Index and holds listed small-cap stocks with distinct growth characteristics. It uses a sophisticated quantitative model to capture market inefficiencies and aims to deliver better performance than typical index-tracking products.

It suits investors who want the high growth potential of US small caps but also seek excess returns through more active stock selection than simple index investing offers.

Launched by First Trust in 2011, it is a passively managed (index-tracking) ETF.

Using the Nasdaq US 700 Small Cap Index as its universe, the model evaluates three growth factors, such as price volatility and sales growth, and three value factors, such as price relative to book value. It then selects the top-ranked stocks and builds the portfolio by assigning different weights to each ranking group.

• Stock selection based on the proven AlphaDEX quantitative model
• A smart beta strategy designed to overcome the limitations of market-cap weighting

Assets under management (AUM) stand at $1.4B, and the expense ratio is 0.70% per year.

Because of its sophisticated stock selection process, its fees are on the higher side compared with typical index ETFs, but it seeks to differentiate performance through active factor exposure.

The fund has posted positive results, driven by the strong showing of promising small caps in the technology innovation and healthcare sectors, and it is benefiting from capital rotation into small and mid caps during the economic recovery phase.

Interest in small-cap investing is rising as an alternative to the concentration in US large caps, and capital is increasingly flowing in from investors who want selective, fundamentals-based exposure.

It is an efficient vehicle for pursuing high returns by identifying high-quality small-cap growth stocks, but investors should be mindful of the high volatility typical of small caps and the prediction errors of quantitative models.

While VUG and IWF shown in the table hold portfolios centered on large-cap growth stocks, FYC focuses squarely on the small-cap market. Direct large-cap alternatives include IVW and SCHG, while similar small-cap index products include VBK and IWO. If you want simple index tracking rather than a quantitative strategy, IJR is also worth comparing.

FYC is a specialized product that seeks excess returns in the US small-cap market through a quantitative model, so before investing, use the key checklist below to confirm that it fits your investment profile.

Small caps react very sensitively to economic conditions and interest rate changes. Investors should also be aware that performance can become unstable when the market environment shifts abruptly in ways the quantitative algorithm fails to predict.

It is a suitable tool for aggressive investors who want to invest in the small innovative companies that symbolize the dynamism of the US economy. It is a core asset worth considering for those who want to improve the efficiency of small-cap investing through a sophisticated selection process.