Using the fund-of-funds investment strategy has proven quite successful for many US fund managers. First Trust Advisors, the Illinois-based seventh-largest issuer of exchange-traded funds, recently launched a dynamic version of its most popular sector-rotation ETF that can incorporate cash allocation during periods of heightened market volatility.
The First Trust Dorsey Wright Dynamic Focus 5 ETF (FVC) employs the same methodology as its highly successful $3.41 billion cousin – the First Trust Dorsey Wright Focus 5 ETF (FV), with the addition of a short-term cash-equivalent index. Since the launch of FV in 2014, First Trust has progressively expanded its offerings with momentum specialists Dorsey, Wright & Associates (DWA).
FVC tracks the performance of the Dorsey Wright Dynamic Focus Five Index – an innovative gauge developed and owned by DWA, the investment advisory firm that specializes in relative strength analysis and uses proprietary methodology to achieve investment outcomes.
The index aims to provide targeted exposure to five First Trust industry-and-sector specific ETFs that have the greatest potential to outperform other First Trust ETFs as determined by DWA’s proprietary investment strategy, and that satisfy certain trading volume and liquidity criteria.
The process involves ranking ETFs based on price momentum with the strongest positive relative momentum funds securing the highest rank. All the five index-constituent funds are weighted equally. Relative strength analysis is done twice every month and constituents are replaced if they show weakness compared to other ETFs within the eligible funds universe.
FVC also has the option to allocate assets to 1– to 3 months US Treasury bills, weighted according to the NASDAQ US T-bill Index. The fund begins to allocate to the cash index when the relative strength of more than one-third of the universe of First Trust ETFs begins to diminish relative to the NASDAQ US T-bill Index.
The cash index is evaluated twice every month and may constitute between 0% and 95% of the fund’s underlying index.
The First Trust Energy AlphaDEX Fund is the new fund’s top holding (18.68 percent), followed by the First Trust Dow Jones Internet Index Fund (18.67 percent), the First Trust Consumer Discretionary AlphaDEX Fund (18.37 percent), the First Trust Consumer Staples AlphaDEX Fund (18.37 percent) and the First Trust Utilities AlphaDEX Fund (18.24 percent).
FVC charges 79 basis points annually.
Disclosure: No holdings