First Trust switches ETF to Dorsey Wright momentum strategy

Aug 18th, 2017 | By | Category: Equities

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First Trust has announced changes to the First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH), transitioning the ETF to a new strategy that will harness investment advisory firm Dorsey, Wright & Associates’ research into relative strength analysis to rotate among large-cap equities and Treasuries. To reflect the changes, the fund will be rebranded the First Trust Dorsey Wright People’s Portfolio ETF (Nasdaq: DWPP).

First Trust switches ETF to Dorsey Wright momentum strategy

The new ETF will track the Nasdaq Dorsey Wright People’s Portfolio Index.

Launched in 2012, VIXH struggled to attract demand from investors and currently has approximately $5.2m in assets under management. First Trust will be hoping to generate new interest in the fund by transitioning it to DWPP, where the fund will track the Nasdaq Dorsey Wright People’s Portfolio Index.

Dorsey Wright determines ‘relative strength’ by comparing the price performance, or momentum, between asset classes (various equity groups and Treasuries). According to Dorsey Wright, the absolute momentum of the individual asset class is not as important as the relative momentum between them. The model determines whether momentum is increasing relative to another asset class and assigns a buy signal if it is. The asset classes are then ranked in descending order according to their cumulative number of buy signals.

In terms of DWPP’s index, the relative strength analysis determines whether the fund should be tracking equities or Treasuries. If equities is selected, a second round of relative strength analysis is used to determine if the fund should track the market cap-weighted Nasdaq US 500 Large-Cap Index or the equal-weighted Nasdaq US Large Cap Equal Index. Both equity indices include the same components but weight them differently.

As long as the index is in risk-on mode, its equities will be rebalanced semi-annually; however, the relative-strength analysis, determining whether the allocation should be to equities or Treasuries, is done on an ongoing basis.

DWPP has a total expense ratio (TER) of 0.60%.

Momentum based strategies rely on investors continuing to support stocks which are increasing in value. Investors are indeed trend chasers regarding stock movements, continuing to buy as the stock price increases and sell as it decreases. Some investor traits that have been identified through the study of behavioural finance may provide an explanation.

Investors tend to anchor themselves to perceptions of stock value, responding slowly to new information contradicting their valuations. Also, investors wish to avoid the regret of mistiming the market. In this case they may hold the stock longer than is prudent, not wishing to sell early and miss out on potential returns. Due to these factors, these strategies have historically provided superior returns when compared to broad market cap-weighted equity indices.

First Trust offers three other ETFs in the US that tap into Dorsey Wright’s relative-strength approach. The largest is the $2.4bn First Trust Dorsey Wright Focus 5 ETF (Nasdaq: FV).

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