Factor Rotation ETF Launched

First Trust offers its take on dynamic multifactor ETFs.

Reviewed by: etf.com Staff
Edited by: etf.com Staff

Today First Trust is rolling out an ETF that uses a factor rotation approach. The First Trust Lunt U.S. Factor Rotation ETF (FCTR) tracks an index provided by Lunt Capital Management.

The fund comes with an expense ratio of 0.65%. It lists on the Cboe BZX exchange; ETF.com’s parent company is Cboe Global Markets.

FCTR covers large-cap U.S. equities as represented by the Nasdaq US 500 Large Cap Index. It uses a relative strength approach to target four different factors that are each represented by two subindexes. There are four indexes representing the 50 companies exhibiting the highest exposure to the momentum, value, quality and low-volatility factors, and another four indexes targeting the 50 companies exhibiting the lowest exposures to those same four factors, according to the prospectus.

“This is a little different in that it has the opportunity to, on a monthly basis, have exposure to the opposite [side of each factor],” said First Trust ETF Strategist Ryan Issakainen.

“It’s addressing the concern that some advisors have had that factors can go out of favor for long stretches of time,” he added. “For example, the value factor for the last 10 years hasn’t really worked out that well.”

Relative-Strength Approach

Every month, the methodology uses relative-strength analysis to determine whether each factor’s high exposure or low exposure subindex has demonstrated the most relative strength. Ultimately, each of the four factors is represented by either its high- or low-exposure subindex, the document says, adding that the choice related to each pair of factor subindexes is binary.

The companies included in each subindex are weighted by their factor scores. Interestingly, while the subindexes for momentum, value and low volatility are rebalanced twice a year, the quality subindex is only rebalanced once a year, the prospectus says.

With four subindexes included every month containing 50 securities apiece, the index can offer exposure to up to 200 securities, but the actual number will usually be less since individual stocks can be included in multiple indexes due to their factor exposures, Issakainen points out. In fact, the prospectus notes that, as of mid-July, FCTR’s underlying benchmark covered 166 securities.

While there are multifactor ETFs that dynamically adjust their exposures to individual factors, this is the first multifactor fund to use relative strength to determine the factor exposure.

Contact Heather Bell at [email protected]

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