First Trust has launched an equity factor rotation ETF in partnership with Lunt Capital Management. Listed on Cboe BZX, the First Trust Lunt US Factor Rotation ETF (FCTR US) rotates among four style factors to provide exposure to large-cap US equities.
First Trust has launched an equity factor rotation ETF in partnership with Lunt Capital Management.
The fund is linked to the proprietary Lunt Capital Large Cap Factor Rotation Index.
The index follows a risk-adjusted relative strength methodology to allocate among momentum, value, volatility and quality – as represented by a series of sub-indices – depending on when they come into favour.
“In recent years, the investment industry has highlighted the value of single and multi-factor investment solutions,” said John Lunt, President, Lunt Capital. “The fund embraces a multi-factor approach with the important innovation of applying factor rotation.”
“We are very pleased to join First Trust in launching the First Trust Lunt US Factor Rotation ETF. First Trust and Lunt Capital both have a history of innovation, which made it a natural fit to work together in the next evolution of factor investing—multi-factor rotation,” added Lunt.
The strategy monitors eight sub-indices, each of which exhibits the characteristics of the high and low side of the four style factors. Each sub-index is composed of 50 securities selected from the Nasdaq US 500 Large Cap Index, and the companies within each sub-index are weighted by their factor scores to maximize exposure to the high or low side of that factor.
The eight sub-indices are ranked to determine which side of each factor (high or low) is exhibiting stronger risk-adjusted relative strength. Each of the sub-indices is given a score and the top four scoring sub-indices are selected for inclusion in the index and equally weighted. A high and a low sub-index from the same factor cannot be selected during the same period.
A newly selected sub-index inherits the weighting of the outgoing sub-index. If all four sub-indices change, each will receive a 25% weight.
The eight sub-indices are evaluated monthly. The momentum, value and volatility sub-indices are rebalanced semi-annually and the quality sub-indices are rebalanced annually.
The actual number of constituents in the final index is constrained to 200 due to the methodology but may contain fewer if the same stock is included in multiple indices due to their factor exposures. As of 25 July 2018, the fund had 168 holdings.
The fund has an expense ratio of 0.65%.
Relative strength investing is not new in the ETF space and indeed First Trust already offers a range of strategies in partnership with Nasdaq Dorsey Wright. However, most products use relative strength to rotate between securities within a broad market index or sector-specific index; between sector, country or regional indices; or even between asset classes.
This new fund is relatively unique in that it explicitly applies relative strength across a variety of factor exposures.