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FV - First Trust Dorsey Wright Focus 5 ETF
FV - A Dynamic Relative Strength ETF from First Trust
In today's increasingly competitive world of exchange-traded funds (ETFs), investors are on the lookout for diverse and innovative solutions to help them achieve long-term growth and resilience in their portfolios. In this blog post we will examine FV from First Trust.
Relative Strength - The key ingredient for FV
Investing in the stock market can be an overwhelming endeavor, especially when considering the countless stocks, metrics, and strategies available. To achieve consistent success in investing, it is crucial to have a systematic approach that helps you identify promising opportunities. One such tool that has proven to be valuable to investors is the Relative Strength (RS) indicator. In this blog post, we will explore the benefits of using RS in investing and how it can help you make informed decisions.
What is Relative Strength?
Relative Strength is a momentum-based technical analysis tool that measures the performance of a stock relative to a specific benchmark, usually a market index such as the S&P 500. By comparing the stock's price change over a specified period to that of the index, investors can determine if a stock is outperforming or underperforming the broader market. RS is typically calculated by dividing the stock's price change by the benchmark's price change over the same time frame.
Identifying Outperformers and Underperformers
One of the most significant benefits of using the RS indicator is its ability to help you identify stocks that are outperforming or underperforming the market. Stocks with a high RS are considered outperformers, meaning they have generated stronger returns than the benchmark index over the given period. Conversely, stocks with a low RS are considered underperformers. By focusing on outperforming stocks, you can position your portfolio for higher potential returns.
Gauging Market Sentiment
Another advantage of using RS is that it provides insights into the prevailing market sentiment. When a stock's RS is rising, it indicates that investors are increasingly bullish on the stock, driving its price higher relative to the benchmark. On the other hand, a declining RS suggests that market participants are growing more bearish, which could signal a potential decline in the stock's price.
Strengthening Portfolio Diversification
Diversification is a key element in reducing investment risk. The RS indicator can help you achieve better diversification by identifying stocks from various sectors that are outperforming the market. By allocating your investments across these high-performing stocks, you can potentially minimize sector-specific risks and improve your portfolio's overall performance.
Timing Entry and Exit Points
The RS indicator can be instrumental in determining optimal entry and exit points for investments. A rising RS can indicate a good time to buy a stock, as it suggests strong momentum and potential for further gains. Conversely, a declining RS can signal that it might be time to sell, as the stock's performance weakens relative to the broader market. By monitoring the RS of your investments, you can make more informed decisions about when to enter or exit positions.
Incorporating Relative Strength into your investing toolbox can provide valuable insights into stock performance, market sentiment, diversification, and timing. By focusing on stocks that demonstrate strong RS, you can enhance your investment strategy and increase the likelihood of achieving consistent, long-term returns. Like any other investment tool, it is essential to use the RS indicator in conjunction with other metrics and techniques to build a robust investment approach that suits your goals and risk tolerance.
About FV - First Trust ETF (From their website):
Investment Objective/Strategy - This exchange-traded fund seeks investment results that correspond generally to the price and yield (before the fund's fees and expenses) of an equity index called the Dorsey Wright Focus Five™ Index. There can be no assurance that the Fund's investment objectives will be achieved.
Index Description According to the Index Provider
The Index is designed to provide targeted exposure to five First Trust sector and industry based ETFs that Dorsey, Wright & Associates (DWA) believes offer the greatest potential to outperform the other ETFs in the selection universe and that satisfy trading volume and liquidity requirements.
To construct the Index, DWA begins with the universe of First Trust sector and industry ETFs.
Using the DWA proprietary relative strength methodology, the ETFs are compared to each other to determine inclusion by measuring each ETF's price momentum relative to other ETFs in the universe.
Each ETF is given a score that allows DWA to objectively determine where it ranks relative to all other ETFs in the universe.
The relative strength analysis is conducted twice monthly. ETFs are replaced when they fall sufficiently out of favor, based on their relative strength, versus the other ETFs within the universe. The Index is rebalanced so each position is equally weighted.
FV Link: https://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=FV
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