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Why This Bank ETF Got So Big So Fast

April 3, 2017 9:09 am
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Why This Bank ETF Got So Big So Fast

Hundreds of new exchange traded funds came to market last year. Many if not all of the ETFs that debuted in 2016 would be envious of the First Trust Nasdaq Bank ETF (NASDAQ:FTXO).

The First Trust Nasdaq Bank ETF debuted in late September and now has almost $904 million in assets under management, thanks to a rapid, recent growth spurt.

The smart beta FTXO “is far from a well-known ETF having only debuted late last September. But it has attracted an impressive over $870 million year-to-date via creation flow,” said Street One Financial Vice President Paul Weisbruch in a recent note.

But Why?

Explaining the rapid influx of assets to FTXO is not difficult: The ETF recently joined the First Trust Dorsey Wright Focus 5 ETF (NASDAQ:FV). In fact, FTXO is now FV's largest holding at a weight of 20.7 percent.

Although FV is passively managed and tracks the Dorsey Wright Focus Five Index, that index's methodology allows for changes to its five-ETF lineup. FV's underlying index conducts relative strength analysis twice per month and that can trigger additions and departures from the ETF.

For the week ended March 30, FTXO hauled in more than $694 million in assets, about $100 million than departed the First Trust Energy AlphaDEX Fund (NYSE:FXN) indicating that it was FXN that was dropped from FV. Translation: Advisors that follow the FV strategy were buying FXTO and selling FXN.

FTXO tracks the Nasdaq U.S. Smart Banks Index which “selects the 30 most liquid eligible bank securities from the NASDAQ U.S. Benchmark Index and then ranks those securities based on three factors: 1) Volatility – trailing 12-month price fluctuation 2) Value – cash flow to price, 3) Growth – the 3-, 6-, 9-, and 12-month average price appreciation. The securities are weighted based on their score on the three factors. The index weighting methodology includes caps to prevent high concentrations among single stocks. The index is reconstituted annually and rebalanced quarterly.”

The ETF holds 30 stocks. As impressive as its growth has been, perhaps it should come with asterisk or a nod of the hat to FV.

FTXO has returned 26 percent since coming to market, topping the largest financial services ETF by 500 basis points over that period.

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