A Wild Day For A Beloved Momentum ETF

Plenty of exchange traded funds experienced acute volatility at the open of U.S. markets Monday and the First Trust Dorsey Wright Focus 5 ETF FV was no exception.

FV, an ETF beloved by advisors and investors that are followers of Dorsey Wright's momentum-based, relative strength strategies, shows an intra-day range of $11.70 to $22.98. While that could speak to conspiracy theories of a mini “flash crash” for FV, charts for the ETFs five holdings all show similarly wild candles and wide intraday ranges.

For example, the First Trust NYSE Arca Biotechnology Index Fund FBT traded as low as $70, but now resides above $110 while the First Trust Health Care AlphaDEX Fund FXH touched $44.41 before running back above $63. FBT and FXH are FV's two largest holdings, combining for more than 46 percent of FV's weight.

FV's other holdings are the First Trust Dow Jones Internet Index Fund FDN, First Trust Consumer Staples AlphaDEX Fund FXG and the First Trust Consumer Discretionary AlphaDEX Fund FXD. Yes, that trio have also traded in jaw-dropping ranges.

Monday's chaos not withstanding, FV's roster speaks to the ETF's vulnerability in the current market environment. Said another way, what drove the ETF higher for much of this year is now an albatross, that being significant biotech exposure. Not only is FBT, the second-largest biotech ETF by assets, FV's largest holding, but FXH, the AlphaDEX health care ETF, has a 20.2 percent weight to biotech stocks.

Another Problem

Biotech is not the only problem for FV. The ETF's Internet exposure via FDN, also previously a selling point, has turned problematic. Nine of FDN's top 10 holdings, a group that combines for nearly 60 percent of that ETF's weight, are members of the Nasdaq Composite and that benchmark has tumbled 7.1 percent over the past month.

Things have gotten so rough for momentum stocks and ETFs that over the past month, the best-performing member of FV's roster is FXG, the AlphaDEX consumer staples ETF, and that fund is still down 3.5 percent.

However, there is a silver lining with FV. Though FV is considered a passively managed ETF, relative strength analysis of its constituent ETFs is conducted weekly, meaning if one (or more) of the holdings tumble enough, they can be removed from FV and replaced with other First Trust sector and industry funds displaying better relative strength traits.

On that subject, it is interesting to note that FV debuted in March 2014, right before the albeit somewhat brief biotech and Internet meltdown experience that year, and the fund's holdings have yet to change.