Exchange traded fund firm First Trust has launched a new ETF offering investors access to a sector rotation strategy. The First Trust Dorsey Wright Dynamic Focus 5 ETF is listed on Nasdaq (Nasdaq: FVC) and has a total expense ratio of 0.89%. It tracks the performance of the Dorsey Wright Dynamic Focus Five Index.

The ETF adopts a ‘fund of funds’ structure, investing in five sector ETFs that are displaying the strongest positive price momentum.

The index is owned and developed by Dorsey, Wright & Associates (DWA), an investment advisory firm whose innovative solutions draw upon the firm’s expertise in relative strength analysis.

The index is designed to provide targeted exposure to five First Trust sector and industry based ETFs as identified by DWA’s proprietary methodology. The process involves analysing an ETF’s price momentum relative to its peers and ranking the ETFs from strongest positive relative momentum to weakest. The index equally weights the top five ETFs.

The index also has the potential to allocate to 1- to 3-month US Treasury bills represented by the Nasdaq US T-Bill Index. The index begins allocating to the cash index when the relative strength of the Nasdaq US T-Bill Index is ranked fifth among all eligible ETFs and will increase the target allocation to cash in 20% increments as the cash index moves higher in the rankings. As such, when the Nasdaq US T-Bill Index is displaying the strongest relative strength among all eligible First Trust sector ETFs, the Dorsey Wright Dynamic Focus Five Index will be 100% exposed to cash.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, said in a statement: “The First Trust Dorsey Wright Dynamic Focus 5 ETF provides a simplified way for financial advisors and their clients to gain exposure to a sector rotation strategy with the ability to allocate to cash equivalents. Dorsey Wright’s research on relative strength is widely followed and we are pleased to offer this fund which tracks an index that combines their insights with First Trust’s lineup of sector and industry ETFs.”

The theory behind supporting securities or sectors with strong positive momentum is that investors will continue to bid up their prices due to certain behavioural biases such as regret aversion – holders of an appreciating stock may be reluctant to sell, even if they believe current prices exceed intrinsic value, as they do not wish to miss out on gains by selling before the security’s price has peaked.

This is not the first time First Trust and Dorsey Wright have come together. Earlier this month they worked with  discretionary fund manager Copia to bring two smart beta portfolios to the UK adviser market.