The new fund falls into the "smart beta" category I have written about recently. Such funds use custom screens to select components from broad-based indices in an effort to outperform their benchmarks.
FTCS starts by identifying the 500 largest U.S. stocks that have at least $5 million in daily trading volume. The ETF screens those 500 stocks to find the ones with at least $1 billion in cash or short-term investments, a ratio of market cap to long-term debt of less than 30% and a return on equity greater than 15%. From there, it scores the stocks for volatility, and the fund purchases equal amounts of the 50 stocks that have the lowest volatility.
FTCS also has rules to avoid being overly concentrated in any single sector, capping exposure at 30%. The index is reconstituted quarterly.The current sector makeup favors industrials, at 20%, followed by consumer services at 19%, health care at 17%, consumer goods at 17% and tech at 10%. The fund has no exposure to utilities or telecom. Omitting those two sectors is logical because they tend to be very debt-heavy. FTCS is oriented toward large-cap stocks, so most of the names in the fund should be familiar to you, such as MasterCard (MA), Qualcomm (QCOM) and Nike (NKE). Interestingly, defense contractors make up 8% of the fund, which could smooth out the ride for FTCS if the situation in Syria escalates into a situation that is bad for the markets in general but good for defense stocks. First Trust has said that it converted its more traditional large-cap value fund into the Capital Strength fund after realizing that many investors are concerned about how fast the market has gone up in recent years and worried that the fundamentals do not necessarily support the big rally.
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