USA
Complex Factor Rotation from First Trust
Smart beta ETFs keep getting more sophisticated.
In a sign of this increasing sophistication, First Trust is teaming up with Salt Lake City-based consultancy Lunt Capital Management to list a smart beta ETF that uses eight sub-indexes to rotate between factors. The First Trust Lunt US Factor Rotation ETF (FCTR) will track indexes developed by Lunt and calculated by Nasdaq using its patented relative strength criteria.
FCTR will track an index of US large caps organised around four separate factors: momentum, value, quality and volatility. In order to time the market, FCTR will use Nasdaq’s risk-adjusted relative strength to score and rotate between factors, the prospectus says. The relative strength score picks from the eight sub-indices based on low risk and high return.
FCTR defines its factors as follows:
Each of the four factors has two sub-indexes, with each sub-index representing one end of the spectrum for stocks exhibiting the greatest and least characteristics of that factor. FCTR then uses risk-adjusted relative strength rules to score each pair of factors to determine based on which it thinks (i.e. high or low) will perform best.
It selects the highest ranked side (i.e. high or low) of each of the four factors. The sub-indices are composed of U.S. large cap equity securities weighted by factor score within each sub-index, with the highest scoring security receiving the highest weight. The momentum, value and volatility sub-indices are rebalanced semi-annually and the quality sub-indices are rebalanced annually.
The Index will consist of 150 - 200 securities at any time. As of July 17, 2018, the index comprised 166 market cap-weighted securities.
Korea
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