First Trust International Developed Capital Strength
ETF
Ticker: FICS
Exchange: NASDAQ
Expense ratio: 0.70%
CUSIP: 33738R662
Listing date: December 17, 2020
Adviser: First Trust Advisors L.P.
Index provider: NASDAQ
Index: The International Developed Capital Strength Index
Constituents: 50
Strategy/Index Methodology Summary
The International Developed Capital Strength Index seeks to provide exposure to well-capitalized companies in the developed markets outside of the U.S. with strong market positions that have the potential to provide their stockholders with a greater degree of stability and performance over time.
Universe: securities comprising the NASDAQ Developed ex-US Index, an index seeking to track the performance of small, mid and large capitalization international companies (Developed countries ex-U.S.).
- Screen for liquidity three months > 5 million shares.
- Exclude multiple share classes of same issuer.
- Select top 500 by market capitalization.
- Exclude those securities issued by companies:
- with less than $500 million in cash and short-term investments
- with a long-term debt to market capitalization ratio greater than 30%,
- with a return on equity that is 15% or less
- that are currently in bankruptcy proceedings
- companies that have entered into a definitive agreement or other arrangement which would likely result in the security no longer being Index eligible.
The remaining securities are then given a volatility score based upon a combination of their short-term (three month) and long-term (one year) historical volatility.
The 50 securities with the lowest volatility score are chosen for inclusion in the Index.
Industry and country screen
- If industry or country has weight > 30% of index, then remove security with highest volatility and replace with next security on volatility ranking list.
- Repeat until no industry or country has weight > 30% of index.
If the number of securities in the Index is less than 50, then the securities that had the highest return on equity that failed the criteria but passed the debt to market cap ratio and cash and short term investments constraints are selected from the top 500 by free float adjusted market capitalization to go back into the eligible universe until there are 60 eligible securities.
Then, the above steps are repeated to select 50 securities with the lowest combined volatility scores that meet the industry and country constraints.
Prospectus is here.
Portfolio Managers
The Fund’s portfolio is managed by an “Investment Committee” consisting of:
- Daniel J. Lindquist
- Jon C. Erickson
- David G. McGarel
- Roger F. Testin
- Stan Ueland
- Chris A. Peterson
MORE ETF HEARSAY
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Strategy/Index Methodology Detailed
The Fund seeks to achieve its investment objective by investing, under normal market conditions, at least 90% of its net assets (including investment borrowings) in the common stocks and real estate investment trusts (“REITs”) that comprise The International Developed Capital Strength IndexSM (the “Index”).
The Fund will generally employ a full replication strategy, meaning that it will normally invest in all of the securities comprising the Index in proportion to their weightings in the Index.
However, under various circumstances, full replication of the Index may not be possible or practicable, and the Fund may purchase a sample of securities in the Index.
The Fund will use the net total return version of the Index, which reinvests cash dividends on the ex-date and adjusts for an Index security’s country of incorporation withholding rate.
The Index is developed, maintained and sponsored by Nasdaq, Inc. (the “Index Provider”).
The Index Provider may, from time to time, exercise reasonable discretion as it deems appropriate in order to ensure Index integrity, for example, in response to stock splits, spin-offs or other corporate actions.
The Index seeks to provide exposure to well-capitalized companies in the developed markets outside of the U.S. with strong market positions that have the potential to provide their stockholders with a greater degree of stability and performance over time.
The Index Provider classifies a country as “developed” based on quantitative criteria including: (1) having at least $20 thousand gross national income per capita for three consecutive years;
(2) having at least a $30 billion market capitalization;
(3) having at least a $10 billion annual turnover;
(4) having at least a 45% float ratio; and
(5) having at least ten securities that meet all the eligibility requirements for the NASDAQ Global Index.
For countries that meet these quantitative criteria, the Index Provider also applies qualitative criteria, such as screening for markets that may have restrictions on foreign investment, currency convertibility or capital.
The Fund may invest in securities of any market capitalization.
The Index’s initial universe consists of the securities comprising the NASDAQ Developed ex-US Index, an index seeking to track the performance of small, mid and large capitalization international companies.
The Index then excludes all securities with a three-month average daily trading volume of less than $5 million and multiple share classes of the same issuer.
The Index then ranks the remaining securities by float-adjusted market capitalization and excludes all securities not ranked in the top 500.
Float-adjusted market capitalization reflects what the Index Provider believes to be the outstanding shares minus non-publicly held shares multiplied by the market price.
The universe is further narrowed by excluding those securities issued by companies with less than $500 million in cash and short-term investments, companies with a long-term debt to market capitalization ratio greater than 30%, companies with a return on equity that is 15% or less, companies that are currently in bankruptcy proceedings and companies that have entered into a definitive agreement or other arrangement which would likely result in the security no longer being Index eligible.
The remaining securities are then given a volatility score based upon a combination of their short-term (three month) and long-term (one year) historical volatility. Volatility is a statistical measure of the magnitude of changes in the security’s return without regard to the direction of those changes, and higher volatility generally indicates higher risk and is often reflected by frequent and sometimes significant movements up and down in value.
The 50 securities with the lowest volatility score are chosen for inclusion in the Index.
A review is then enacted to determine if any industry (as determined by the Industry Classification Benchmark (“ICB”)), or country has a weight greater than 30%.
If an industry or country has a weight greater than 30%, the worst-ranking security by volatility will be removed and replaced with the next eligible security (e.g., the 51st ranked by volatility) from a different industry or country.
This process is repeated until no industry or country has a weight greater than 30%. Once finalized, each security is equal-dollar weighted, meaning each security’s Index market value is an equal-dollar value corresponding to an equal percent weight of the Index’s aggregate market value.
If the number of securities in the Index is less than 50, then the securities that had the highest return on equity that failed the criteria but passed the debt to market cap ratio and cash and short term investments constraints are selected from the top 500 by free float adjusted market capitalization to go back into the eligible universe until there are 60 eligible securities.
Then, the above steps are repeated to select 50 securities with the lowest combined volatility scores that meet the industry and country constraints.
The Index is rebalanced and reconstituted semi-annually and the Fund will make corresponding changes to its portfolio shortly after the Index changes are made public.
The Fund will be concentrated in an industry or a group of industries to the extent that the Index is so concentrated.
As of December 2, 2020, the Index was composed of 49 securities.
As of December 2, 2020, the Fund had significant investments in industrials companies and Japanese issuers, Asian issuers and European issuers, although this may change from time to time.
To the extent the Fund invests a significant portion of its assets in a given jurisdiction or investment sector, the Fund may be exposed to the risks associated with that jurisdiction or investment sector.
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