First Trust Large Cap Growth ETF In Focus (FTC) [First Trust Large Cap GO Alpha Fnd (ETF)]

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March 11, 2014 3:44pm NYSE:FTC

in focus spotlightU.S. stocks have again gained momentum after a weak start to 2014.  Markets are trading at multi-year highs with the S&P 500 hitting new highs each passing day.

Though escalating political tensions between Ukraine and Russia was a drag over the last couple of days, things have been sorted out for the time being and the markets appear to be on track.

Also, the recent data on jobs has brought back some optimism in the market. Recent data showed that nonfarm payrolls for February increased by 175,000 (m/m) compared to the consensus increase of 150,000.

Thus, with the strengthening labor market, rebounding auto sales numbers and GDP growth in the positive zone, it seems that optimism is back in the markets. While small cap stocks had certainly led the rally last year, an improving global growth environment is expected to work in favor of large caps this year.

Large caps appear to be more attractively valued and are poised to lead the market further. After several years of outperformance, smaller-cap stocks now appear rather expensive.

Also, with large cap companies sitting on a pile of cash on their balance sheets, growth companies are expected to perform better. Investors would do well to consider these growth stocks. These companies are expected to use their surplus cash for stepped-up capital investments and hiring.

Growth investing is a momentum play and is a good strategy in a trending market scenario. Growth companies seek to achieve higher earnings growth, which goes a long way to boost their share prices.

However, investors should keep in mind that stocks with growth characteristics have comparatively higher P/B, P/S and P/E ratios than their value counterparts.

Thus, given the pros and cons, and considering that the current trending market is ripe for large cap growth stocks, investors may target these stocks via the ETF route. One way to find a top ranked ETF in the large cap growth space is by using the Zacks ETF Ranking system.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class.

The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the large cap growth sector, we have taken a closer look at the top ranked FTC, which has a Zacks ETF Rank of 1 or Strong Buy with a ‘medium risk’ level. The details are highlighted below (see all the Large Cap ETFs here).

First Trust Large Cap Growth AlphaDEX Fund (NYSEARCA:FTC)

Launched in May 2007, FTC manages an asset base of $285.1 million and seeks to track the performance of the Defined Large Cap Growth Index before fees and expenses.

The index employs AlphaDEX methodology, wherein companies are assigned scores on certain growth and value factors. The stocks which receive the highest growth scores are eligible for inclusion in the Defined Large Cap Growth Index.

The fund holds a basket of 176 stocks and is pretty well diversified among its individual holdings. None of the stocks form more than 1.5% of the total assets and the top ten stocks form merely around 11% of the fund assets. Actavis plc (1.21%), Harman International Industries (1.18%) and Delta Air Lines (1.14%) are the top three holdings of the fund.

Sector wise, Consumer Discretionary (26.38%) dominates the fund, followed by Industrials (19.9%) and Information Technology (16.7%). Meanwhile, as far as expenses are concerned, the fund is an expensive choice in its category, charging investors 70 basis points a year.

However, the charges seem to be justified given the fund’s performance. The fund performed quite well last year, returning a stellar 37.71%. Also, the fund is up 5% since the start of the year.

Bottom Line

Given the ongoing recovery in the U.S. markets, FTC is surely a great choice for investors seeking exposure to large cap growth stocks. Also, given its favorable rank, FTC is expected to outperform in the near future (read: Best ETF Strategies for 2014).

Though slightly pricey when compared to other choices in the space, it shouldn’t bother investors much, considering its performance history of late. So, investors can surely consider adding this product to their portfolio to boost returns.

This article is brought to you courtesy of Eric Dutram.

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