Back to top

ETF News And Commentary

Currently, the equity markets are nearing their record highs. Investors, on their part, are turning cautious as they seek stability in investments along with lower risk due to increased market volatility.

Investors are worried about the sluggish conditions in the developed world and some key emerging markets like China, a deeper euro zone crisis, continued strength in U.S. dollar and a global commodity sell-off (read: Avoid These 3 Eurozone ETFs This Summer).

In such a backdrop, First Trust, the Illinois-based ETF issuer best known for its unique sector specific ETFs, has made some modifications to the First Trust Strategic Value Index Fund . The fund name will change to First Trust Capital Strength ETF (FTCS) effective June 3rd, while the index will also change as well.

Existing Methodology

FDV currently tracks the Credit Suisse U.S. Value Index, an equally weighted index which measures the performance of 50 U.S. stocks with the highest market capitalization and highest HOLT valuation score.

The product is heavily skewed towards the information technology sector, as 30% of the asset goes to this sector, with Hewlett–Packard (HPQ) and Cisco Systems (CSCO) holding the top two positions (read: Is the Tech ETF Signaling Trouble Ahead?).

The ETF is relatively unpopular though, as it has failed to garner investor interest with only $36.8 million in its asset base and roughly 5,000 shares in average trading volume each day. This is somewhat surprising as the ETF has seen a solid performance so far in 2013, adding more than 18% in the time period.

New Methodology

In order to generate some interest in the product, and to avoid going through a new—and possibly lengthy-- registration process, the fund will be shifting its focus.

The revamped ETF seeks to match the price and yield of the Capital Strength Index, before fees and expenses. This is an equal-dollar weighted index that provides exposure to well-capitalized companies with strong market positions based on strong balance sheets, high degree of liquidity, ability to generate earnings growth, and record financial strength and profit growth (read: Are Low Volatility ETFs Capable of Big Gains?).

Specifically, the securities in the index should have long-term debt ratio below 30%, return on equity above 15%, and the lowest combined short- and long-term volatility scores.

With respect to the fund’s holdings, the top three firms will include Raytheon (RTN - Analyst Report), Illinois Tool Works (ITW - Analyst Report) and Microsoft Corp (MSFT - Analyst Report). The product will be tilted towards industrials with 23% share, while heath care, consumer goods, and consumer services, round out the next three spots in the basket with 19%, 17%, and 14% shares, respectively.

The expense ratio will remain at 0.65%.

Bottom Line

The new index could provide investors with better performance potential, and a focus on lower volatility stocks that have favorable ROE and long term debt levels. It also helps First Trust to better round out their lineup, giving investors a new option in the equal-weight market (see more in the Zacks ETF Center).

Clearly, there are some differences between the old and new benchmarks. Hence, the recent change in the fund could impact its exposure profile going forward. So if you were thinking about FDV or are currently a holder of the fund, it is important to note that some big changes are heading your way in June for this ETF, which could definitely impact the risk return profile going forward for the new FTCS.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Please login to Zacks.com or register to post a comment.

If you wish to go to ZacksFunds.com, click OK. If you do not, click Cancel.

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
SIGNET JEWE… SIG 116.37 +7.72%
INSITE VISI… INSV 0.30 +7.11%
CHYRONHEGO… CHYR 2.72 +5.84%
US SILICA H… SLCA 70.72 +4.00%
MALLINCKROD… MNK 80.11 +2.32%