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Following a type of enhanced indexing methodology that favors value-oriented companies, the First Trust Capital Strength ETF (NASDAQ:FTCS) has outperformed the broader market.

FTCS has gained 26.4% year-to-date and generated an average annualized return of 11.6% in the past five years. In comparison, the S&P 500 index is up 21.4% year-to-date and returned an average 10.5% over the last five years.

The Capital Strength ETF picks holdings from a basket of 500 largest U.S. stocks with at least $5 million in daily trading volume, screening for companies that have $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 higher than 15%, writes Roger Nusbaum for TheStreet. The ETF then equally weights 50 stock picks with the lowest volatility.

According to First Trust, the underlying holdings will better weather a large downturn or periods of heightened volatility since the companies have flexible cash holdings and are less at risk due to their low debt.

FTCS includes quality picks like Raytheon Company (NYSE:RTN), MasterCard (NYSE:MA), Qualcomm (NASDAQ:QCOM), Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC).

Additionally, sector exposure is capped at 30%. Top sector allocations include industrials 20.9%, consumer services 19.9% and healthcare 17.6%. Utilities and telecom are not included as they tend to be debt heavy.

Historically, the industrials fare the worst in bearish market conditions, but the sector recovers more than the broad market in bull rallies.

Defense contractors also make up about 8% of the fund, which could perform if Middle East tensions escalates.

The Capital Strength ETF was previously known as the First Trust Strategic Value Index Fund (FDV). FDV was revamped earlier this year.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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