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By Patricia Oey | 10-06-2015 11:00 AM

Warning: This Popular ETF May Cause Motion Sickness

First Trust Dorsey Wright International Focus 5's momentum strategy has worked so far, but investors could be in for a bumpy ride.

Patricia Oey: First Trust Dorsey Wright International Focus 5 (IFV) has had an impressive start, gathering about $600 million in assets since it launched in July 2014.

This international-equity ETF employs a momentum strategy and uses screens to pick five First Trust country or regional funds that have recently outperformed. This strategy is based on the observation that areas of the market that are currently outperforming tend to continue to outperform. So far, the fund's strategy is working. Over the last year, it outperformed its market-cap-weighted benchmark by about 500 basis points.

Momentum can work really well for a period of time, typically during a bull market. But when the market suddenly turns, momentum strategies tend to be overweight in areas that fall the fastest. So, net-net, over a full market cycle, any outperformance during the bull market can get wiped out during a market decline. For example, in 2011, when the MSCI EAFE Index was down about 12%, a similar Dorsey Wright international-equity ETF declined 18%.

We don't cover this fund, as we feel that funds like this are difficult to use, given the volatility in performance. The average investor is prone to buy when the fund is rising and sell after a sharp decline. Investors who don't like scary surprises in their portfolio are better off in less-volatile strategies.

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