First Trust Value Line Fund: Taking a Closer Look

| About: First Trust (FVL)
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While most mutual fund firms shied away from ETFs initially, many have now seen the light, and are actively planning to finally enter into the ETF space. While the forays of Schwab, T. Rowe Price, and Goldman Sachs have received a great deal of media coverage, the ETF adventures of institutions best known for their stock analysis services is seldom discussed.

A number of these companies have partnered with ETF issuers to develop funds that blur the lines between active and passive management. One of the oldest and most famous such firms is Value Line, an investment research firm that has been cited as one of the best by some of America’s most famous investors. “I don’t know any other system that’s as good,” said Warren Buffett regarding Value Line’s analysis.

Value Line uses a proprietary methodology to rank roughly 1,700 stocks and forecast their relative performance over the next six to 12 months. The top stocks are rated “1″ while the worst stocks are rated “5″ in various categories including safety, performance, and most importantly for Value Line, timeliness. While some are probably skeptical, the results speak for themselves.

According to the Value Line website, stocks rated number 1 for timeliness have outperformed the S&P 500 by a factor of 15 to 1 since 1965. For investors impressed with the Value Line numbers, there’s an interesting ETF product out there: Value Line has partnered with First Trust to create an ETF that focuses on the 100 highest rated stocks for timeliness, the First Trust Value Line 100 Fund (NYSEARCA:FVL).


FVL tracks the Value Line 100 Index, a benchmark that uses a quantitative methodology to select holdings from a list of stocks that Value Line has rated “1″ for timeliness. This rating is done on a weekly basis by screening millions of data points, including long-term earnings and price trends, recent company earnings and price performance, and earnings relative to expectations. Using a proprietary series of calculations, each stock is then ranked for relative performance over the next year. The top 100 are then included in the index.


Changes to the portfolio occur on a quarterly basis based on Value Line’s analysis, so it is interesting to see which sectors the fund overweights and underweights. FVL currently has substantial allocations towards the consumer sector, with 38% of holdings in consumer discretionary and 8% in consumer staples. Information technology and health care also have large allocations with about 24% and 21%, respectively.

Curiously, materials and energy stocks only make up a combined 3% of the fund, suggesting that Value Line is very bearish on these stocks relative to other sectors of the market. For market capitalization, the fund is heavily skewed towards mid and small cap stocks; its median market capitalization is just $2.7 billion.

Returns and Fees

FVL’s performance in 2010 has been impressive, but the fund has lagged behind SPY by a wide margin over the past 52 weeks. Furthermore, when investors are considering this fund they must keep in mind that although Value Line updates its information on a weekly basis, FVL only rebalances quarterly, so some stocks that were ranked “one” at the beginning of a quarter may no longer be in the top echelon but still included in the fund.


Most ETF investors have gravitated towards passive market cap-weighted funds for bulk of their equity exposure, but several alternative options have seen an uptick in interest in recent months

For investors who have embraced the benefits of the ETF structure (e.g., tax efficiency, enhanced transparency, etc.) but still believe that quantitative analysis has the potential do deliver excess returns, the First Trust Value Line fund may be an interesting option.

Disclosure: No positions at time of writing.