First Trust brings capital strength ETF strategy to Europe

Jan 31st, 2020 | By | Category: Equities

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First Trust has launched a new US equity ETF in Europe, providing smart beta exposure to a portfolio of quality companies with strong balance sheets and less volatile stock prices.

Gregg Guerin, Senior Product Specialist for First Trust

Gregg Guerin, Senior Product Specialist for First Trust.

The First Trust Capital Strength UCITS ETF (FTCS LN) has listed on the London Stock Exchange in US dollars and comes with an expense ratio of 0.60%. Income is accumulated within the portfolio.

The fund replicates the strategy behind one of First Trust’s first US-listed ETFs – the First Trust Capital Strength ETF (FTCS US) – which launched in 2006 and currently houses over $3.5 billion in assets under management.

Methodology

Both ETFs are linked to the Capital Strength Index which selects its constituents from a universe of the largest 500 US-listed equities with three-month average daily dollar trading volume above $5 million.

The methodology first targets exposure to stocks aligned with the quality factor risk premium by examining eligible companies’ balance sheets and income statements. Specifically, the index screens for firms with at least $1 billion in cash or short-term investments, a long-term debt-to-market-cap ratio below 30%, and a return-on-equity greater than 15%.

Qualifying securities are ranked by combined short-term (three month) and long-term (one year) realized stock price volatility, and the 50 securities with the lowest combined volatility score are selected.

Constituents are equally weighted while ensuring a maximum exposure of 30% to any one sector based on the Industry Classification Benchmark. If the sector limit is breached, the security from that sector with the highest volatility score is removed and replaced with the next eligible stock from a different sector. The index is rebalanced on a quarterly basis.

According to First Trust, by combining exposure to quality and low volatility factors, the fund offers the potential for increased stability and positive performance in all market conditions and may provide long-term outperformance compared to either factor individually.

Gregg Guerin, Senior Product Specialist for First Trust, commented, “Over the last twenty-five years in times of market instability, quality and less volatile US equities have historically outperformed the S&P 500 Index in down months by 74% and 85% respectively. We are pleased to bring this rules-based strategy to market and believe FTCS offers advisers and wealth managers the potential for protecting in negative markets while participating in increasing markets. This is the latest addition First Trust has brought to market to provide advisors a ‘rules-based’ investment alternative, wrapped in a transparent and efficient UCITS ETF structure.”

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