First Trust’s ‘FDV’ Folds Into New ETF Monday

May 31, 2013

The firm is retrofitting FDV into a brand-new Capital Strength ETF that tilts toward growth rather than value.

The First Trust Strategic Value Index Fund (NYSEArca: FDV) is about to be discontinued Monday and turned into a completely new fund—albeit also a U.S. large-cap equities strategy—that hones in on well-capitalized, low-volatility names.

The $64 million ETF has struggled to gain much traction since it came to market roughly seven years ago, so First Trust has decided to have FDV become the First Trust Capital Strength ETF (NasdaqGM: FTCS).

FTCS will also serve exposure to U.S. large-caps, but in a portfolio that’s tilted toward growth, low-volatility stocks rather than FDV’s focus on large-cap value names.

The fund, which will track a Nasdaq-provided Capital Strength Index, screens companies for strong, well-capitalized balance sheets, liquidity, the ability to generate earnings growth, and a track record of financial strength and profit growth, according to data provided by First Trust. It will cost a net of 0.65 percent a year, or $65 per $10,000 invested.

FDV has faced a rather rocky path up to now, having had its benchmark switched once before from a Deutsche Bank index to a Credit Suisse index back in 2010, only to continue seeing its asset-gathering efforts remain flat despite what’s been a relatively strong performance.

The 50-holding portfolio heavily allocated to information technology, energy and financials has tagged on gains of nearly 35 percent in the past year, with year-to-date gains now hovering around 20 percent.

First Trust has had success with this “capital strength” theme before in a roster of unit investment trusts the company offers. The company says that investor demand should expand into a similar strategy in an ETF wrapper because low-volatility exposure to growth stocks is still not that easy to find, Ryan Issakainen, First Trust’s ETF strategist, told IndexUniverse.

“Investors are looking for this type of exposure partly because of the success we’ve seen in low-volatility index products,” Issakainen said. “FTCS is a lower-beta-growth portfolio that should complement well other low-vol strategies that tend to be heavy on defensive stocks.”

Only common stocks and REITs are eligible for inclusion in FTCS, and only those 500 largest companies with a minimum three-month average daily trading volume of $5 million are selected from the Nasdaq U.S. Benchmark Index.

These companies must have more than $1 billion in cash and a return on equity that exceeds 15 percent. The top 50 companies with the lowest combined short- and long-term volatility are picked in order to seek out only those companies that show lower historic risk while also showing consistent price performance.

The index, which is an equally weighted basket of stocks that caps individual sector exposure at 30 percent, rebalances quarterly.

Consumer goods and services represent roughly 30 percent of the portfolio, while industrials snag nearly 23 percent of the mix, and health care stocks come in at 19 percent. FTCS also allocates about 12 percent to technology.



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