First Trust Makes Changes To The Strategic Value Index ETF

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June 2, 2013 10:46am NYSE:FDV NYSE:FTCS

first-trust-portfoliosCurrently, the equity markets are nearing their record highs. Investors, on their part, are turning cautious as they seek stability in investments along with lower risk due to increased market volatility.

Investors are worried about the sluggish conditions in the developed world and some key emerging markets like China, a deeper euro zone crisis, continued strength in U.S. dollar and a global commodity sell-off.

In such a backdrop, First Trust, the Illinois-based ETF issuer best known for its unique sector specific ETFs, has made some modifications to the First Trust Strategic Value Index Fund (NYSEARCA:FDV). The fund name will change to First Trust Capital Strength ETF (NYSEARCA:FTCS) effective June 3rd, while the index will also change as well.

Existing Methodology

FDV currently tracks the Credit Suisse U.S. Value Index, an equally weighted index which measures the performance of 50 U.S. stocks with the highest market capitalization and highest HOLT valuation score.

The product is heavily skewed towards the information technology sector, as 30% of the asset goes to this sector, with Hewlett–Packard (HPQ) and Cisco Systems (CSCO) holding the top two positions.

The ETF is relatively unpopular though, as it has failed to garner investor interest with only $36.8 million in its asset base and roughly 5,000 shares in average trading volume each day. This is somewhat surprising as the ETF has seen a solid performance so far in 2013, adding more than 18% in the time period.

New Methodology

In order to generate some interest in the product, and to avoid going through a new—and possibly lengthy– registration process, the fund will be shifting its focus.

The revamped ETF seeks to match the price and yield of the Capital Strength Index, before fees and expenses. This is an equal-dollar weighted index that provides exposure to well-capitalized companies with strong market positions based on strong balance sheets, high degree of liquidity, ability to generate earnings growth, and record financial strength and profit growth (read: Are Low Volatility ETFs Capable of Big Gains?).

Specifically, the securities in the index should have long-term debt ratio below 30%, return on equity above 15%, and the lowest combined short- and long-term volatility scores.

With respect to the fund’s holdings, the top three firms will include Raytheon (RTN), Illinois Tool Works (ITW) and Microsoft Corp (MSFT). The product will be tilted towards industrials with 23% share, while heath care, consumer goods, and consumer services, round out the next three spots in the basket with 19%, 17%, and 14% shares, respectively.

The expense ratio will remain at 0.65%.

Bottom Line

The new index could provide investors with better performance potential, and a focus on lower volatility stocks that have favorable ROE and long term debt levels. It also helps First Trust to better round out their lineup, giving investors a new option in the equal-weight market (see more in the Zacks ETF Center).

Clearly, there are some differences between the old and new benchmarks. Hence, the recent change in the fund could impact its exposure profile going forward. So if you were thinking about FDV or are currently a holder of the fund, it is important to note that some big changes are heading your way in June for this ETF, which could definitely impact the risk return profile going forward for the new FTCS.

This article is brought to you courtesy of Eric Dutram From Zacks.

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