Innovator Fund Goes Passive

Last week, a fairly sizable ETF made an interesting structural change. The $208 million Innovator IBD 50 Fund (FFTY) converted itself from an actively managed fund into a passively managed one.

It’s debatable how significant that change actually is. The fund was already closely tied to the index it used as a benchmark, essentially selecting its components from the stocks included in the growth-oriented IBD 50 Index and reweighting them using a proprietary ranking system. It even aimed to maintain a similar sector exposure.

Methodology

As of Nov. 15, FFTY tracks the index that previously served as its benchmark. The IBD 50 Index covers U.S.-listed securities, including American depositary receipts, selecting the top growth companies from a universe of 7,000 securities.

It screens out companies based on a variety of thresholds and then scores the remaining pool based on 11 factors. Those include earnings per share, relative price strength, sales margin return on equity, accumulation distribution, industry group relative strength, growth in earnings, annual growth rate, sales growth, acceleration in sales, liquidity and annual return on equity.

The index has a tiered weighting methodology that takes the top-scoring 50 securities and weights them in tiers. Securities with the 10 highest scores get weights of 3.5% each, while the next 10 are weighted at 3% each, the next 10 at 2%, the next 10 at 1% and the final 10 with the lowest scores weighted at 0.5%, the prospectus said.

The index’s methodology also includes a hedging feature that relies on specific market signals. If any of those four conditions occur, the index switches to a 50% cash allocation and cuts the weights of each of its equity components by half to account for that. It will only switch back to a full equity allocation if one of three market conditions—all related to the price of the S&P 500 Index—occur. FFTY’s index is reconstituted and rebalanced weekly.

There has been no change to the fund’s underlying expense ratio of 0.80%, despite its switch to passive.

Bruce Bond and John Southard, co-founders of the ETF issuer now known as Invesco PowerShares, are also co-founders of Innovator Capital Management.

Contact Heather Bell at [email protected]