First Trust Dorsey Wright DALI Equity ETF (DALI)

DALI is a fund that picks stocks using chart patterns and momentum analysis. It is sponsored by First Trust and uses a proprietary system developed by Dorsey Wright, a research firm focused on technical analysis. If you are comfortable with the idea that past price movements and chart patterns can hint at future stock performance, DALI might make sense; if you believe that charts are meaningless and only fundamentals matter, you will think it is gambling.

What is relative-strength analysis and how does DALI use it?

The Dorsey Wright system looks at how each stock’s price has moved relative to the broad market and to other stocks in its sector over recent months. A stock showing “relative strength” is one that has outperformed its peers — it has climbed faster or fallen less. The theory is straightforward: stocks in uptrends tend to keep going up, and stocks in downtrends tend to keep going down, at least in the near term. By buying the strongest performers and avoiding the weakest, you tilt your portfolio toward momentum.

DALI holds around 100 large-cap U.S. stocks selected because they rank highly on the Dorsey Wright relative-strength rankings. These positions are rebalanced regularly — usually monthly or quarterly — to keep the portfolio aligned with the current technical setup. If a stock loses its relative strength, it exits the fund. If a new one shows up on the strongest-list, it enters.

Why this matters

Momentum-based investing is controversial. Academic studies show that buying recent winners and selling recent losers has worked in real money over long time periods, especially in certain market regimes. Yet the effect is not reliable: in sideways or choppy markets, or when the investing world abruptly shifts sentiment, momentum strategies can crash. You buy the winners at a moment when they are popular and expensive; then they become unpopular and cheap, and you have already sold them.

DALI is simpler than a fundamental stock-picker who reads earnings reports and visits factories. It relies on chart patterns and price history. Some investors find this elegant and liberating — no need to forecast earnings or understand accounting. Others find it circular or backwards, since it reacts to price changes rather than attempting to predict them.

How DALI trades and costs

The fund trades on the NASDAQ exchange during market hours, like any other stock. The expense ratio is reasonable — lower than an actively managed fund with human analysts, higher than a dirt-cheap index fund holding the entire S&P 500. Because the index methodology is proprietary and the rebalancing schedule is set, there is no hidden active management; you know what you are getting.

Bid-ask spreads on DALI shares are tight, meaning you can typically buy or sell without losing much to trading friction. The intraday rebalancing of the underlying index can occasionally create tiny premium or discount to net asset value, but these are usually trivial.

Risks and volatility

A relative-strength fund will be more volatile than the broad market. By concentrating on the strongest performers, you are buying high and selling low relative to the long-term average. In years when the market soars, DALI can shine — a rising tide that lifts all boats lifts the fastest boats even higher. In years when the market tanks or when investor sentiment shifts abruptly, DALI can fall harder than the overall index.

Market crashes hit momentum strategies particularly hard because the stocks that had been outperforming suddenly stop, and you are forced to sell them into weakness. The fund is also exposed to all the usual equity risks: sector concentration, company-specific shocks, and the simple fact that stock prices can move against you for years.

Who buys DALI?

DALI appeals to investors who believe in the power of momentum and trend-following. Traders with active styles may use it as a core holding or as a tactical allocation when they think the market is in an uptrend. Some investors layer it on top of a diversified portfolio as a satellite position for growth. It works well for someone with a higher risk tolerance and a time horizon of years rather than decades.

It is less suitable for conservative investors saving for near-term goals, or for anyone uncomfortable with short-term volatility. It should not be anyone’s only stock holding.

Researching DALI

Check the fund’s holdings and turnover rate. High turnover — sales and purchases of securities — may create tax consequences for people holding it in taxable accounts. Look at how DALI performed in recent periods when growth stocks sold off or when the market rotated from momentum stocks to value stocks; if those periods made you uncomfortable, the fund may not be right for you.

Compare its annual returns over rolling three- and five-year periods against a simple broad-market index such as the S&P 500. Sometimes momentum wins, sometimes it does not. Understand your own feelings about short-term price swings; if watching your holding fall 30% in a bad year will make you panic and sell at the bottom, this is not the fund to own.