Dorsey’s FV Hits $1.3B; Top 2014 ETF Launch

It’s official: The First Trust Dorsey Wright Focus 5 ETF (FV | C-23) was the top launch of 2014. After pulling in a staggering $1.2 billion in inflows since its March 2014 launch, FV’s total assets now sit at $1.3 billion.

FV is a “fund of funds” that follows Dorsey Wright’s popular Focus 5 Model. It pulls five First Trust sector and industry ETFs exhibiting the greatest relative strength and equal-weights them with a quarterly rebalance.

The momentum-driven ETF currently holds ETFs targeting the biotech, health care, consumer staples, consumer discretionary and Internet sectors.

When the five ETFs are broken down by individual stock holdings—as we do in our ETF.com Analytics—FV carries an overall growth bias, trading at a trailing price-earnings multiple (P/E ratio) of 33.13 versus the SPDR S&P 500 ETF’s (SPY | A-98) 19.26 P/E.

Keep in mind that most of First Trust’s sector ETFs are not cap-weighted. With three of the current five ETF holdings based on First Trust’s AlphaDex methodology, and its biotech ETF holding being an equal-weighted portfolio, FV tilts heavily toward midcaps.

FV’s Returns

FV’s returns thus far offer a mixed picture. For 2014, since its launch date on March 6, 2014, FV slightly underperformed SPY.

But in the second half of the year, the fund trounced the broad market’s returns. Investors likely took notice, as FV pulled in $882 million in net inflows from July 1 through the end of the year.

Charts courtesy of StockCharts.com

FV’s second-half outperformance likely drew a lot of attention, but what else is behind the meteoric rise in FV’s popularity?

Tom Dorsey gave some insights in a recent interview with ETF.com.

Pre-Existing Demand

Most importantly, Dorsey pointed out that the Focus 5 Model used by FV has been a popular model used by wire house brokers and investment advisors for years before it was packaged into an ETF wrapper.

Advisors who previously needed to write five separate ticket charges to execute the model can now access the model with a single ticket by using the ETF. In short, according to Dorsey, there was already “pent-up demand” for the ETF long before it launched.

Since FV is based on technical strength models, does it mean its holdings will change frequently? Not necessarily.

The Dorsey Focus 5’s holdings are “stickier” than most folks think. Tom Dorsey points out that things in motion tend to stay in motion longer than expected, and that U.S. equities have been No. 1 in his model since October 2011, and remains No. 1 more than three years later.

What’s Next For 2015?

How FV performs in the near future will likely depend on the strength of the overall U.S. market, since the fund’s current five holdings are all U.S.-focused. FV isn’t specifically a U.S.-focused ETF, but the majority of First Trust’s sector and industry ETFs—FV’s selection universe—are U.S.-focused funds.

Still, keep in mind that there are a few “global” ETFs eligible for inclusion—including copper, water and platinum ETFs—so FV’s composition could look different at some point if new “strength” leaders rise up and knock out any of the current top five ETFs.

The most basic takeaway is this: For technical and momentum fans out there, FV continues to offer a simple way to capture Dorsey Wright’s well-known Focus 5 model in a single ETF wrapper.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.