The fund of funds approach that is often associated with the hedge fund universe has a presence in the exchange traded products industry with the newest addition being the First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV).
The First Trust Dorsey Wright Focus 5 ETF debuted Thursday, making a Dorsey Wright strategy used by advisors and institutional investors accessible to a broader audience. FV tracks the Dorsey Wright Focus Five Index which is comprised of “five First Trust sector and industry based ETFs identified by DWA’s index methodology to offer the greatest potential to outperform the other ETFs in the selection universe,” according to a statement.
Those ETFs are as follows: First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT), First Trust Dow Jones Internet Index Fund (NYSEArca: FDN), First Trust Health Care AlphaDEX Fund (NYSEArca: FXH), First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca: FXD) and the First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG).
With the possible exception of FXG, FV’s holding can be considered momentum, which is not surprising as ETFs exhibiting exceptional relative strength characteristics are one of the hallmarks of the Dorsey Wright indices that are behind scores of other successful ETFs.[Another Momentum ETF Tops $1B in Assets]
FV’s methodology is easy to understand. The selection universe is First Trust’s lineup of sector and industry funds. While not actively managed, FV “is rebalanced periodically so each position is equally weighted. DWA believes the design of the index allows them to identify major themes in the market, have exposure to those sectors whose price action is superior to others in the universe and eliminate exposure to those sectors whose price action is sub-par relative to others in the universe,” according to the statement. [First Trust Debuts Focus 5 ETF]
Said another way, the five First Trust sector and industry ETFs with the best relative strength traits will gain entry to FV. If a current holding becomes a laggard and its relative strength falters, it will depart the ETF.
That does not mean excessive portfolio turnover. Of FV’s five holdings, the same five ETFs found in the Focus 5 model used by professional investors, FBT is the newest addition. The biotech fund entered the model in June 2013. FDN and FXD have been a part of the model since the second quarter of 2009. FXH and FXG entered the model in 2011 and 2012, respectively.
Sector diversity is one issue investors need to consider. Health care has been on fire for over a year, leading to FBT and FXH combining for almost 42% of FV’s weight. Then there is some, albeit slight, single stock risk. [Study Your Biotech ETFs]
“Google (NasdaqGS: GOOG) has an almost 10% weighting in FDN which means Google has about a 2% weighting in FV’s current allocation. The answer to how much it too much is up to the individual but should be monitored for anyone who believes 2 to 3% in one stock is a lot,” writes Roger Nusbaum for TheStreet.com.
FDN’s top-five holdings combine for over a third of that ETF’s weight. Of FV’s other holdings, only FBT allocates more than 7% to any of its constituents.
FV Components
