The New First Trust Dorsey Wright Focus 5 ETF In Focus [iShares Trust]

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March 19, 2014 4:01pm NYSE:FDN NYSE:FXD

in focus spotlightFirst Trust has been famous for its ‘smart indexing’ and unique approach under which the issuer looks to pick better stocks in countries or sectors. The company has just announced a relatively fresh-themed product targeting sectors with high price appreciation

, seeking to give investors higher returns in a somewhat rocky investing environment.

This newcomer — Dorsey Wright Focus 5 ETF – hit the market on March 6 and trades with the ticker symbol ‘FV’.

FV in Focus

The new ETF looks to have an enhanced exposure by following the Dorsey Wright Focus Five Index. The index is designed to indentify the five First Trust sector and industry based ETFs that are arguably expected to have the maximum chance of outperforming the other ETFs in the selection universe, per the issuer. In short, FV is an ETF of ETFs.

The new portfolio is based on momentum strategies as measured by Dorsey Wright’s definition of relative strength characteristics. DWA essentially eliminates the underlying ETFs’ volume, intraday net asset value (NAV) or bid/ask spread and closely monitors how their prices are performing versus other ETFs within their respective universe.

Stocks with high relative strength scores (strong momentum) are given higher weights in the index while those with low relative strength scores (weak momentum) are underweighted. For FV, the index has picked up only those sectors with finer price action and opted out sectors showing sub-par price performance.

The following are the sector ETFs comprising FV: First Trust NYSE Arca Biotechnology Index Fund (FBT), First Trust Dow Jones Internet Index Fund (FDN), First Trust Health Care AlphaDEX Fund (FXH), First Trust Consumer Discretionary AlphaDEX Fund (FXD) and the First Trust Consumer Staples AlphaDEX Fund (FXG) (read: 2 Rising ETFs With Double-Digit Yields).

The five ETFs are almost weighed equally. As of March 6, 2014, FBT has taken up 21.99% of the portfolio followed by FDN, FXH, FXD and FXG occupying 21.67%, 19.92%, 18.51% and 17.90%, respectively. FV charges 95 bps in fees for this almost unique exposure.

The index goes through a weekly review and is rebalanced periodically. ETFs will also be substituted as soon as these fall out of favor, based on their relative strength against other suitable funds, according to First Trust (read: PowerShares Changes Name and Index for 9 Sector ETFs).

This ETF could be appropriate for investors seeking a momentum play on the high-flying market segments. Though the recent indicators point toward weakness in the U.S. economy, the stock markets are hovering at multi-year high levels. The aforementioned sectors have also so far managed to brave the economic sluggishness and could outperform in the days ahead on their sound underlying fundamentals.

In such a scenario, having FV in one’s portfolio might prove a wise decision. FV revolves around momentum investing which is an investment style that makes investors in line with markets that have been aggressively trending, in an attempt to make use of any short-term or long-term opportunities thanks to the prevailing sentiment.

Considering today’s towering market, FV’s investing style should gift investors with interesting returns. Also, the fund will prove to be a good choice for investors who want well-diversified exposure across sectors.

ETF Competition

This is not the first time that investors get to purchase an ETF made of ETFs. Many ETFs in the diversified portfolio space are structured in this form. However, FV operates in the large cap blend equities ETF space which is ruled by the largest and most actively traded U.S. ETF SPDR S&P 500 ETF (SPY) having an asset base of about $159 billion.

Also, FV should face competition from momentum ETFs as the former is especially meant for momentum plays. The momentum ETF space is ruled by iShares MSCI USA Momentum Factor ETF (MTUM) rising about 5.11% this year against 1.93% in SPY. Making its debut in April 2013, MTUM has so far amassed about $231 million in assets (read:  iShares Launches 5 US-Focused ETFs).

Bottom Line

We still believe that FV’s approach is unique in both the large cap blend and momentum equities ETF space — which are truly crowded areas – and should not face any difficulty in building up a sizable asset base. To add to this, all its underlying ETFs fall under the Zacks top-ranked category indicating FV should be the center of attention within a short span of time.

This article is brought to you courtesy of Eric Dutram.

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