Global exchange-traded fund provider State Street Global Advisors has teamed up with Dorsey, Wright & Associates (DWA) to launch a fixed income strategy ETF. The SPDR Dorsey Wright Fixed Income Allocation ETF (DWFI) is a fund of funds and is based on DWA’s signal-driven, momentum-focused technical index.

The ETF adopts a ‘fund of funds’ structure, investing in fixed income sector ETFs that are displaying the strongest positive total return momentum.

The ETF, listed on NASDAQ, tracks the performance of the Dorsey Wright Fixed Income Allocation Index.  The index is designed to provide targeted exposure to the SPDR fixed income ETFs that offer the greatest potential to outperform within the selection universe. The selection universe includes US-listed SPDR fixed income ETFs. Each of these ETFs has a targeted exposure to a specific sector of the global bond market, which includes: US and non-US developed and emerging market bonds, treasury bonds, corporate bonds, high yield bonds, inflation-protected bonds, convertible preferred stock, US municipal bonds and US convertible securities.

DWA’s proprietary index methodology ranks each fixed income sector (generally represented by a single ETF or the combination of two ETFs) by relative strength and selects the four top-ranked sectors for an initial equal-weighted inclusion. In the context of the Dorsey Wright strategy, ‘relative strength’ compares the price performance, or momentum, between each fixed income sector. According to Dorsey Wright, the absolute momentum of the individual fixed income sector is not as important as the relative momentum between the sectors. The model determines whether a sector’s momentum is increasing relative to another sector and assigns a ‘buy’ signal if it is. The sectors are then ranked in descending order according to their cumulative number of ‘buy’ signals. The index is reviewed and rebalanced periodically.

Momentum based strategies rely on investors continuing to support securities which are increasing in value. Investors are indeed trend chasers regarding price movements, continuing to buy as the security price increases and sell as it decreases. Some investor traits that have been identified through the study of behavioural finance may provide an explanation.

Investors tend to anchor themselves to perceptions of value, responding slowly to new information contradicting their valuations. Also, investors wish to avoid the regret of mistiming the market. In this case they may hold the security longer than is prudent, not wishing to sell early and miss out on potential returns. Due to these factors, these strategies have historically provided superior returns when compared to broad market cap-weighted indices.

As of 1 June 2016 the top holdings in the index are the SPDR Wells Fargo Preferred Stock ETF (25.2%), SPDR Nuveen Barclays Municipal Bond ETF (25.0%), SPDR Barclays Emerging Markets Local Bond ETF (24.7%), SPDR Barclays International Treasury Bond ETF (16.7%) and the SPDR Barclays Intermediate Term Corporate Bond ETF (8.3%).

The fund has a total expense ratio of 0.60%.

“We think that bond markets are likely to exist in a low yielding and relatively uncertain environment for the foreseeable future, and we continue to look to provide unique solutions for investors to navigate these markets and seek to meet their return targets,” said Nick Good, co-head, Global SPDR business at State Street Global Advisors. “With the launch of DWFI we are excited to have developed a relationship with DWA that allows SSGA to offer a convenient, cost effective, exchange-traded vehicle tracking an index that is intended, through its relative strength methodology, to respond to changes in price of certain fixed income ETFs, which may reflect volatility, rates and yield spreads.”