First Trust has launched a new ETF that applies its popular ‘capital strength’ investment strategy to developed market stocks outside of the US.
First Trust has rolled out a new ‘capital strength’ ETF targeting developed markets outside of the US. (file image)
The First Trust International Developed Capital Strength ETF (FICS US) has listed on Nasdaq Exchange and comes with an expense ratio of 0.70%.
The fund complements the US-focused First Trust Capital Strength ETF (FTCS US) which launched in 2006 and currently houses nearly $7 billion in assets under management.
Both ETFs provide smart beta exposure to profitable companies with robust financial strength and low price volatility.
According to First Trust, by combining exposure to quality and low volatility factors, the strategy offers the potential for increased stability and positive performance in all market conditions and may provide long-term outperformance compared to either factor individually.
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented, “2020 has been a reminder of the importance of quality for navigating uncertain times. In our view, this applies just as much for international stocks as it does for US stocks.
“We believe this ETF will be an effective tool for investment professionals seeking high-quality exposure to developed international stocks.”
Methodology
The fund is linked to the International Developed Capital Strength Index which selects its constituents from a universe comprising the 500 largest equities listed in developed markets outside of the US. Eligible securities must have a three-month average daily dollar trading volume above $5 million.
The methodology first targets exposure to the quality factor risk premium by examining companies’ balance sheets and income statements. Specifically, the index screens for firms with at least $500 million in cash or short-term investments, a long-term debt-to-market-cap ratio below 30%, and a return-on-equity greater than 15%.
Qualifying securities are ranked by combined short-term (three month) and long-term (one year) realized stock price volatility, and the 50 securities with the lowest combined volatility score are selected.
Constituents are equally weighted while ensuring a maximum exposure of 30% to any one country or sector based on the Industry Classification Benchmark. If the country or sector limit is breached, the security with the highest volatility score from that country or sector is removed and replaced with the next eligible stock from a different country or sector. The index is rebalanced on a quarterly basis.
Stocks from Japan account for one quarter (24.3%) of the total index weight, while the next largest country exposures are Switzerland (16.2%), the UK (11.5%), Sweden (10.6%), and Canada (10.0%).
Exposure to industrial stocks is presently significant at 28.3%, while health care, consumer discretionary, technology, and financials also play notable roles with weights of approximately 15% each.