Momentum strength is always good to have as a tailwind for an uptrending ETF, but what about a fund that captures the comeback in value as well? Thankfully, there is such a fund in the First Trust Dorsey Wright Momentum & Value ETF (DVLU).

Volatility in growth stocks is swinging investors toward value again.

“The long-awaited rotation from growth to value has arrived. At least this is what many value investors believe,” a Forbes article said. “With this (potential) rotation comes a renewed debate about the future of value investing that will shape the philosophy’s evolution for years to come.”

“Many stock market pundits and value investing advocates believe that value stocks—stocks often categorized by their low price-to-earnings or price-to-book multiples—are poised to reverse a long period of underperformance relative to their faster-growing peers,” the article added.

The fund is up almost 30% year-to-date. That momentum has been sustained over the past 12 months with the fund up 70%.

DVLU Chart

A Rules-Based Strategy

DVLU seeks investment results that correspond generally to the price and yield of an index called the Dorsey Wright Momentum Plus Value Index. The fund uses an indexing investment approach to replicate the performance of the Index.

Fund features:

  • Based on a rules-based equity index that is designed to track the overall performance of the 50 most undervalued stocks within the NASDAQ US Large Mid Cap Index that maintain high levels of relative strength.
  • The Fund’s investment advisor seeks a correlation of 0.95 or better between the fund’s performance and the performance of the Index; a figure of 1.00 would represent perfect correlation.
  • To construct the index, Dorsey, Wright & Associates (DWA) begins with the eligible constituents of the NASDAQ US Large Mid Cap Index.
    • These eligible constituents are determined after meeting certain criteria, including maintaining a minimum average daily dollar volume of $1 million for the 30-day period prior to evaluation.
  • Each security is assigned a relative strength score based on its forward price momentum compared to the momentum of a broad market benchmark index. Securities that exhibit a minimum level of relative strength are eligible for inclusion in the index.
  • Eligible securities are individually ranked on four ‘value’ metrics:
    1. Price-to-Sales Ratio
    2. Price-to-Book Ratio
    3. Price-to-Earnings Ratio
    4. Price-to-Cash Flow Ratio
  • Each security is assigned a percentile rank for each of the four metrics listed above, and a cumulative value score is then calculated for each security by averaging the percentile scores for each of the value metrics.
  • The securities are then ranked based upon their value scores, and the top 50 securities with the highest value scores are selected for inclusion in the index.
    • The securities are then weighted, with greater weights given to securities with higher value scores.
  • The index is reconstituted and rebalanced quarterly.

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