First Trust Multi Cap Value AlphaDEX® Fund (FAB): Dividend Cut Implications and Value Investing Considerations

The First Trust Multi Cap Value AlphaDEX® Fund (NASDAQ: FAB), a popular ETF tracking a rules-based index of U.S. value stocks, has faced two notable dividend rate reductions in early 2025. Investors focused on dividend sustainability and value investing must weigh these cuts against the fund's valuation metrics and underlying fundamentals. Here's a deep dive into what the cuts mean and whether FAB remains a compelling investment.

The Dividend Cuts: A Closer Look

FAB declared its most recent dividend of $0.3085 per share on June 25, 2025, payable on June 30. This marks a significant drop from the $0.4468 dividend declared in December 2024, a reduction of 29.7%. Earlier in the year, the fund reduced its dividend rate by 3.03% in March (from $1.65 to $1.60) and another 4.38% in June (to $1.53). While the fund's prospectus states that distributions are not guaranteed, these cuts raise questions about the sustainability of its income stream.

Why the Reductions?

The cuts likely stem from a combination of factors:
1. Index Rebalancing: FAB tracks the Nasdaq AlphaDEX® Multi Cap Value™ Index, which rebalances quarterly. This could shift allocations to sectors or companies with lower dividend yields, reducing distributable income. Notably, historical backtests show that buying FAB on rebalancing days and holding for 20 trading days between 2020–2025 resulted in an average return of 7.28%, suggesting short-term gains potential.
2. Sector Vulnerabilities: The fund's top sectors—Financials (21.68%), Energy (13.25%), and Industrials (13.49%)—are cyclical and sensitive to economic headwinds. Declines in these sectors' performance or dividends could pressure FAB's payouts.
3. Expense Pressure: FAB's 0.64% expense ratio eats into net investment income, limiting the amount available for distributions.

Backtest the performance of FAB when 'buy on the day of quarterly index rebalancing' and 'hold for 20 trading days', from 2020 to 2025.

Valuation Metrics: Is FAB Still a Bargain?

As of December 2024, FAB's NAV was $88.95, with a market price of $88.94—a negligible discount/premium. Its 12-month distribution rate was 1.79%, slightly below the index's 2.33% yield. However, value investors should consider:
- Discount to NAV: FAB has historically traded close to NAV, but a sustained premium/discount could signal investor sentiment shifts.
- Expense Efficiency: While the 0.64% fee is reasonable for an actively managed ETF, it compresses yield relative to passive peers.
- Sector Exposure Risks: Overweighting cyclical sectors may amplify volatility during economic slowdowns.

Dividend Sustainability: A Value Investor's Perspective

For value investors prioritizing dividends, FAB's cuts are a red flag—but not definitive. Key considerations:
1. Yield vs. Risk: FAB's yield, though reduced, may still outperform bonds or low-yield equities. However, its exposure to volatile sectors demands a higher risk tolerance.
2. Long-Term Strategy: The fund's focus on value stocks (e.g., low P/B ratios) aligns with classic value principles. If the underlying index rebounds, dividends could stabilize.
3. Alternatives: Investors seeking safer income might explore lower-fee ETFs or dividend aristocrats with more stable payout histories.

Investment Takeaways

1. Hold for Value, but Monitor Closely: FAB's valuation and sector exposure remain attractive for long-term value strategies. However, investors should track future dividend trends and economic conditions.
2. Avoid Chasing Yield: The recent cuts highlight that FAB's income stream is not immune to market cycles. Prioritize capital preservation over high yields in uncertain environments.
3. Diversification Matters: Pair FAB with dividend-paying ETFs in defensive sectors (e.g., utilities) to balance risk.

Final Thoughts

The First Trust Multi Cap Value AlphaDEX® Fund (FAB) remains a viable option for value investors willing to tolerate volatility. Its dividend cuts, while concerning, reflect broader market and sector dynamics rather than systemic mismanagement. Investors should focus on the fund's valuation relative to its index and maintain a watchful eye on future distributions. For now, FAB's blend of value exposure and moderate fees positions it as a hold, but not a buy, until dividend stability is reestablished.

Investment decisions should consider individual risk tolerance and financial goals. Always review fund prospectuses and consult a financial advisor.