Relative Strength ETF

USA

First Trust lists multi-asset ETF of ETFs

First Trust is listing a multi-asset ETF that uses Nasdaq’s Dorsey Wright-branded stock picking criteria to time the market for each asset class. The First Trust Dorsey Wright DALI 1 ETF (DALI) will assess four asset classes – US equity, international equity, bonds, and commodities – and invest in the asset class most likely to beat the market.

To do this, DALI will compare indexes and ETFs across each asset class for relative strength. Relative strength measures how a security performs compared with the market. A security’s relative strength improves when it beats the market during a bull run or falls less than the market during a downturn. Relative strength is a popular measure of historical performance for technical and momentum traders.

DALI will invest in the asset class with the best relative strength. With the asset class chosen, it will pick a ready-made portfolio. These ready-made portfolios are:

US equity

• 65% of DALI will invest in the “Dorsey Wright Focus Five Index”, which will be made of five First Trust sector ETFs chosen for “greatest outperformance potential,” the prospectus says.
• 35% will be invested in “two or more” First Trust ETFs that invest in US large caps.

International equity

1. 65% will track the Dorsey Wright International Focus Five Index, which is made up of five First Trust country and region-based ETFs.
2. 35% will be equally weighted among two or more First Trust ETFs that invest mostly in international equity

Fixed income

• 65% will be equally weighted among one or more US investment grade bond ETFs.
• 35% will be equally weighted among the four bond ETFs with the highest relative strength.

Commodities

• 100% will be invested in the First Trust Global Tactical Commodity Strategy Fund.

Analysis – a market timing robo-advisor that likes relative strength

Do you like relative strength? Do you use it when constructing your own portfolio or when speculating? Or are you happy sit with boring old beta as found in plain vanilla ETFs?

We ask because almost the entire asset allocation strategy of DALI turns on relative strength. Now, there’s absolutely nothing wrong with this. After all, the smart beta Moby Dick has swelled its blubber thanks to investors’ passion for this type approach. But for DALI to attract assets, it will need to find investors who place a lot of faith in relative strength as a method of stock selection. (And relative strength isn’t quite a factor so much as a sub-factor of momentum). And then have trust in Nasdaq and First Trust to reliably assess it over market cycles.

Another interesting thing about DALI is how similar it is to a robo-advisor. Robo-advisors use ready-made portfolios built out of ETFs. DALI does something very similar, but with the added gloss of using a market timing device to jump between asset classes.

Anyway, this ETF looks like great fun and in many ways breaks new ground. Let’s see how it goes winning investors over.

London

JP Morgan builds more beta

JP Morgan is listing another new “beta building” bond ETF in the UK. The JP Morgan Beta Builders US Treasury Bond 1-3 YR UCITS ETF (JU13, J13U) will track the performance of US Dollar-denominated fixed-rate government bonds issued by the US Treasury with a maturity of between one and three years. It will charge a lean mean fee of 10 basis points.

Cross-listings:

London

Lyxor is cross-listing its new ESG ETFs into London. They are:

Lyxor MSCI USA ESG Trend Leaders DR UCITS ETF (UESG)

Lyxor MSCI EM ESG Trend Leaders DR UCITS ETF (MESG)