First Trust has brought another of its blockbuster US strategies to Europe with the launch of the First Trust Value Line Dividend Index UCITS ETF (FVD LN) on London Stock Exchange.
The focus on quality companies with low risk aims to make the fund more resilient to market downturns.
The fund provides smart beta exposure to a portfolio of quality US companies with low-risk and high-dividend characteristics.
The fund is linked to the Value Line Dividend Index, designed by New York-based investment research house and newsletter publishers Value Line.
The US-listed version of the fund, the First Trust Value Line Dividend ETF (FVD US), which tracks the very same index, launched in 2003 and currently houses over $10 billion in assets under management.
Methodology
Value Line uses its proprietary analysis to assign “Safety Ranks” to each potential constituent based on that firm’s risk relative to other stocks in an initial universe of more than 1,700 US-listed securities (including ADRs). Safety Ranks range from 1 (safest) to 5 (riskiest) and are derived from two equally weighted measurements – a security’s “price stability rank” and “financial strength rating.”
The price stability rank is based on the standard deviation of weekly percent changes in the price of the security over the last five years, while a company’s financial strength rating is a proprietary measure of the firm’s financial condition based on balance sheet analysis.
The index excludes all securities that are not assigned a Safety Rank of 1 or 2 as well as any company with a market capitalization below $1 billion. According to Value Line, back-tested analysis shows that firms with Safety Ranks of 1 or 2 have outperformed the wider market, especially during significant market downturns.
With the index’s initial focus on safety now set, it aims to boost returns by sharpening exposure to high-income companies. Firms with dividend yields below the average dividend yield of the S&P 500 Index are excluded, with the remaining constituents constituting the index. Constituents are equally weighted with index reconstituted and rebalanced monthly.
The index currently has 199 constituents.
[pullquote]“The index methodology has not only stood firm on the downside but has also outperformed the S&P 500 across all major market corrections.”
– Gregg Guerin, Senior Product Specialist, First Trust.[/pullquote]Gregg Guerin, Senior Product Specialist for First Trust, commented, “We are pleased to be expanding our ETF offering with the launch of a quality and low volatility factor-based fund. This latest addition to our equity solutions is a safety-first strategy that can provide investment managers with the potential for greater downside protection during periods of market volatility.
“In fact, in the most recent decade, the index methodology has not only stood firm on the downside but has also outperformed the S&P 500 across all major market corrections.”
The fund comes with an expense ratio of 0.70% which is perhaps on the pricier side compared to other US equity income ETFs with a broadly comparable investment objective. For example, the $110m Invesco S&P 500 High Dividend Low Volatility UCITS ETF (HDLV LN) comes with an expense ratio of 0.30%. This fund tracks the S&P 500 Low Volatility High Dividend Index which selects 50 stocks with high-dividend and low-volatility characteristics from the S&P 500 and weights them by dividend yield.
The ETF is First Trust’s second in as many months following the launch of the First Trust Capital Strength UCITS ETF (FTCS LN) on the LSE in January. This fund replicates the strategy that underlies one of First Trust’s first US-listed ETFs, based on the Capital Strength Index, providing smart beta exposure to a portfolio of quality companies with strong balance sheets and less volatile stock prices.