Once Beloved Momentum ETF Loses Its Momo

With the low volatility, quality and value investment factors outperforming this year, it might be logical to assume momentum is struggling.

FV: Gauging The Momentum Factor

If the once beloved First Trust Exchange Traded Fund VI FV is an accurate gauge, yes, momentum is struggling. Still, FV's 3.3 percent year-to-date loss is not staggering and it cannot be ignored that the ETF is up more than 15 percent off its February lows.

Although 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.

Data suggest FV can outperform the S&P 500, but it potentially does with more volatility.

A Look Back At FV's 'Wild Ride'

FV “has been on a wild ride since its inception. From March 31, 2014, through Aug. 31, 2016, FV’s annualized total return was 8.95 percent, marginally higher than that experienced by Vanguard 500 Index Fund VOO,” said Morningstar in a recent note. “However, FV’s standard deviation of monthly returns during that span was 14.9 percent, versus just 11.1 percent for VOO. Also, FV’s maximum drawdown during the period was 18.7 percent, more than twice that suffered by VOO shareholders (8.4 percent).”

Again, FV is a passive ETF that can and does alter its holdings. Some investors can quibble with how the ETF sends its holdings packing and adds new ones. They might have a point. For example, FV dumped the First Trust NYSE Arca Biotchnlgy Indx Fd FBT earlier this year in favor of the First Trust Utilities AlphaDEX Fnd (ETF) FXU.

FV held onto FBT through a major decline and by sending the ETF packing when it did, FV has missed out on a biotech rebound only to be holding FXU while utilities stocks are giving up big chunks of the gains accrued earlier this year.

FV has been propped by the First Trust DJ Internet Index Fund (ETF)FDN, which is FV's largest holding at over 23 percent of the momentum fund's weight. FDN, the largest U.S. internet ETF, has recently been making a series of all-time highs.

That has not been enough to keep investors interested as highlighted by the $1.57 billion that has been yanked from FV this year.

“While FV returned nearly 9 percent annualized, its investor return over the period in question was actually negative 2.3 percent! While FV kept pace with the S&P 500, the average dollar invested in the fund actually lost money. Momentum strategies have merit, but investors’ ability to effectively harness this fickle factor correlates directly with their intestinal fortitude,” added Morningstar.