First Trust has introduced a new rules-based ETF that utilizes a proprietary methodology to invest in US large and mid-cap companies with strong earnings quality.

The strategy offers a clearer view of a company’s true financial health by focusing on core earnings.

The First Trust New Constructs Core Earnings Leaders ETF (FTCE US) has been listed on NYSE Arca with an expense ratio of 0.60%.

The strategy is based on the concept of ‘earnings capture’ which refers to a method of evaluating a company’s true earnings potential by adjusting its reported earnings to remove distortions caused by accounting practices.

It focuses on assessing core or recurring earnings that more accurately reflect a company’s profitability, excluding items like one-time gains or losses.

By emphasizing earnings capture, the strategy aims to select companies with high-quality earnings that are more sustainable and reliable, providing a clearer picture of a company’s financial health.

Methodology

The fund tracks the Bloomberg New Constructs Core Earnings Leaders Index which is constructed from the Bloomberg US 1000 Index universe, a broad market benchmark covering the 1,000 largest US-listed companies.

Using data from investment research firm New Constructs, the methodology screens for the top 30% of companies in each Bloomberg BICS level 1 sector based on earnings capture.

From this screened universe, the index first includes the largest three companies from each sector before continuing to select the largest companies across the entire universe until the constituent count reaches 100.

Constituents are market cap-weighted with a 4.5% cap on individual stocks, while sector weights are aligned to those of the initial universe. The index is rebalanced quarterly.

As of 3 October, stocks from the information technology sector account for a third (31.7%) of the index, followed by financials (13.1%), health care (11.4%), communication services (10.1%), and industrials (8.7%).