First Trust Dorsey Wright Momentum & Value ETF (DVLU)

DVLU combines two factor screens — momentum, which identifies stocks with recent price strength, and value, which finds stocks trading below fundamental measures of worth. The fund targets investors who believe this blend produces better risk-adjusted returns than owning the entire market or focusing on a single factor alone.

What exactly does DVLU track?

DVLU follows an index constructed by Dorsey Wright, a quantitative research firm specializing in factor-based strategies. The index applies a two-stage filter to the universe of U.S. large and mid-cap stocks. First, it identifies stocks exhibiting momentum — those whose prices have risen meaningfully over the recent past, typically a rolling window of three to twelve months, relative to peers or to the broad market. It then applies a value filter to that momentum-screened group, selecting stocks that trade at depressed valuations relative to earnings, book value, or cash flow. The result is a portfolio of stocks that are rising in price but not wildly expensive on fundamentals — a hybrid that attempts to avoid the pitfall of chasing momentum into stretched valuations.

Why combine momentum and value?

Pure momentum investing buys the strongest recent performers, which can lead to buying stocks that have already run up in price and are due for pullback. Pure value investing hunts for cheap stocks, but sometimes they are cheap because they are genuinely broken and will get cheaper still. By combining the two, DVLU aims to identify stocks that are gaining legitimately and at reasonable prices — not yet fully discovered by the market, or at least not fully repriced.

The screening methodology is entirely systematic and rules-based. There is no portfolio manager exercising judgment. Each month or quarter, the index methodology scores all eligible stocks on momentum and value criteria, then includes those that score well on both. Stocks that fail either screen are excluded. This non-discretionary approach has the advantage of transparency and consistency, but it also means the fund cannot adapt if the factor combination falls out of favor.

What are the holdings and how do they change?

DVLU typically holds 100 to 200 U.S. large and mid-cap stocks, far fewer than a total-market index but still a reasonably diversified portfolio. The holdings rotate regularly as stocks cross the selection thresholds, so turnover can be moderate to high. High turnover matters for tax efficiency — in taxable brokerage accounts, frequent rebalancing can create capital gains distributions. The fact sheet shows the current portfolio composition and the turnover rate.

How much volatility and cost should an investor expect?

The expense ratio is moderate, higher than that of a simple market-cap-weighted index fund but in line with other “smart beta” or factor-based strategies. Liquidity is good because the fund holds large, heavily traded stocks. The real cost is not money but opportunity: DVLU will lag in market environments where neither momentum nor value factors are in favor. In extended periods when growth stocks dominate and cheap, rising-but-not-soaring equities underperform, DVLU can significantly lag a total-market index.

What is the biggest risk?

The fundamental risk is that the factor combination is a bet on a specific market regime. For years after 2015, a growth-stock bull market meant value-based strategies severely underperformed. Adding momentum did not solve the problem — momentum in a growth-stock market led in the same places where value lagged. Investors who bought DVLU near the peak of that growth cycle and held through the subsequent value drought experienced multi-year underperformance. The factor screens cannot adapt to regime shifts.

A second risk is concentration. Because the selection criteria are tight, DVLU is narrower than the total market. If the screened cohort underperforms as a group, the fund has no diversification escape hatch. Factor-based funds work best for investors who can tolerate periods of underperformance and who are willing to hold through full market cycles to capture the long-term edge, if one exists.

How would a reader evaluate whether DVLU is right?

Compare DVLU’s returns and volatility to a simple broad-market index, a pure value index, and a pure momentum index over at least one full market cycle — ideally two or three. A single year or even three years is not enough to judge a factor strategy; the real test is multi-year performance through rising and falling markets. If DVLU has historically delivered higher risk-adjusted returns (better returns per unit of volatility) than its benchmarks, the factor blend may justify its use. If returns are merely in line with one of its components, the added complexity may not pay.

Check the turnover and understand the tax implications. In tax-deferred retirement accounts, turnover does not matter; in taxable accounts, a 50 percent annual turnover can substantially reduce after-tax returns. Read Dorsey Wright’s research on the historical performance of the momentum-plus-value blend and in what environments it has lagged or led. Finally, consider whether DVLU fits as one piece of a diversified portfolio or whether it makes sense as a large position. A factor fund is a bet on a strategy; it should not be your entire equity allocation.