First Trust Advisors has launched the First Trust Dorsey Wright DALI 1 ETF (DALI US) on Nasdaq Exchange. The fund dynamically adjusts its exposure across four broad asset classes based on price momentum signals analysed by relative strength specialist Nasdaq Dorsey Wright.
Dorsey Wright determines ‘relative strength’ by comparing the price performance, or momentum, between asset classes.
DALI invests primarily in other US-listed ETFs to obtain its required exposure.
The underlying reference for the fund is the Nasdaq Dorsey Wright DALI 1 Index which covers US equities, international equities, fixed income, and commodities.
The index’s methodology uses Dorsey Wright’s proprietary Dynamic Asset Level Investing (DALI) process to evaluate supply and demand forces of asset classes, and rank them from strongest to weakest based on a relative strength analysis.
Dorsey Wright determines ‘relative strength’ by comparing the price performance, or momentum, between asset classes. 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.
The asset class with the highest relative strength score is selected for inclusion in the index, and the relative strength analysis to determine the top asset class is performed every two weeks.
Once one of the four broad asset classes is selected as possessing the highest relative strength, the fund’s assets will be allocated to ETFs that provide exposure to that asset class. Part of the allocation will go to specific ETFs as set out in the fund’s prospectus, while the remaining weight will be allocated to ETFs that have been selected based on a second relative strength analysis within the asset class.
Within US equities, 35% will be allocated to First Trust US large and small capitalization ETFs and 65% will be allocated to Dorsey Wright Focus Five Index constituents.
Within international equities, 35% will be allocated to First Trust international ETFs and 65% will be allocated to Dorsey Wright International Focus Five Index constituents.
Within fixed income, 65% will be allocated to US investment-grade fixed income ETFs and 35% will be allocated to Dorsey Wright Fixed Income Model constituents.
When in commodities, the fund will invest 100% of its assets in the First Trust Global Tactical Commodity Strategy Fund.
Jay Gragnani, head of research and client engagement for Nasdaq Dorsey Wright, said, “In times of increasing volatility, the ability to differentiate between the values of asset classes has never been more important. Our relative strength-based asset class ranking system, DALI, has been a mainstay of our research for over a decade, and we are excited to bring this unique strategy to market with First Trust.”
DALI has a management fee of 0.30%. Combined with the fees of the underlying ETFs (estimated as 0.62%) acquired to obtain the relevant asset class exposure, the expected total annual expense to the investor is 0.92%.
DALI brings the number of First Trust ETFs harnessing the Dorsey Wright approach to five, the largest of which is the $2.6 billion First Trust Dorsey Wright Focus 5 ETF (FV US). FV provides exposure to five First Trust US sector and industry-based ETFs with the highest relative strength. It has a total annual expense of 0.89%.
Nasdaq Dorsey Wright also provides relative strength analysis that underpins ETFs provided by ALPS, AdvisorShares, Innovator Funds and Invesco PowerShares.