First Trust Introduces Revamped SMID Growth Strength ETF

The ETF targets high-growth small- and mid-cap companies with strong financial foundations and market presence.

December 04, 2024

Introduction

First Trust has rolled out significant changes to its SMID Growth Strength ETF, refining its strategy and repositioning its index to better capture the growth potential of robust small- and mid-capitalization companies. With a newly adopted SMID Growth Strength Index, the ETF shifts focus to companies demonstrating financial resilience, operational efficiency, and sustainable growth prospects.

The changes, effective December 3, 2024, underscore First Trust's commitment to offering competitive investment solutions that adapt to evolving market conditions and investor demands. Key updates include an enhanced selection methodology, a concentrated industry focus, and streamlined expense ratios, making the ETF a potentially compelling choice for growth-oriented investors.

Strategic Overhaul and Index Shift

The SMID Growth Strength ETF now tracks the SMID Growth Strength Index, developed by Nasdaq, Inc. The updated index prioritizes companies with a strong financial position, including:

• At least $100 million in unrestricted cash or equivalents.


• Positive shareholder equity, revenue, and cash flow.


• A return on equity exceeding 10%.


• Low debt levels, with a long-term debt-to-market-cap ratio below 30%.

These criteria are designed to identify companies that are financially healthy and poised for sustainable growth. The index rebalances quarterly, ensuring that it remains aligned with market dynamics.

The ETF’s underlying index transitioned from the Nasdaq Riskalyze US Small Cap Index, reflecting a broader emphasis on small- and mid-cap growth stocks. While historical performance data reflects the previous index, the fund's management anticipates a seamless transition, with the updated methodology potentially enhancing future returns.

Expense Management and Portfolio Turnover

The ETF maintains a competitive expense ratio of 0.60%, making it cost-effective compared to similar funds. Its portfolio turnover rate, historically at 52%, is expected to increase due to the updated investment strategy. This could result in higher transaction costs and taxable events, but the fund's managers aim to mitigate these impacts through efficient portfolio management.

Performance Highlights

While the fund’s performance reflects the previous index, historical data indicates resilience:

• A 15.84% return before taxes over the past year.


• Five-year average annual returns of 10.92%.


• Positive year-to-date performance of 6.61% as of September 30, 2024.

These results demonstrate the ETF’s ability to navigate market volatility while delivering steady growth.

Risk Factors

Investors should consider several risks associated with the fund, including:

• Market Risk: Economic and geopolitical events can impact the ETF’s holdings.


• Growth Stock Volatility: Growth-oriented stocks are subject to sharp price fluctuations.


• Sector Concentration: The fund's focus on specific industries, like industrials, may heighten susceptibility to sector-specific risks.


• Index Management Risk: Reliance on the accuracy and methodology of the index provider introduces potential tracking errors.

Despite these challenges, the fund’s rigorous selection process and diversified portfolio offer a cushion against broad market downturns.

Outlook and Investor Implications

The First Trust SMID Growth Strength ETF’s refined focus on financially robust, growth-oriented small- and mid-cap companies positions it as a compelling option for long-term investors. By targeting firms with strong balance sheets and operational efficiency, the ETF aims to provide consistent returns amidst market fluctuations.

The fund’s alignment with broader market trends, including a pivot towards high-quality growth stocks, aligns with investor preferences for stability and growth potential. However, investors should weigh the risks of increased turnover and sector concentration against the potential for superior returns.

With its updated strategy and competitive fee structure, the First Trust SMID Growth Strength ETF offers an attractive proposition for those seeking exposure to dynamic growth sectors in the U.S. market.