FFTY: With Momentum Weak, Avoid This ETF (NYSEARCA:FFTY)

Waters are choppy now in market, and latent factors mean downside risks persist. The Innovator IBD 50 ETF (NYSEARCA:FFTY) is not the right pick for these markets, as it’s essentially a momentum ETF, picking high growth and high beta tech stocks that turn on flavour-of-the-day sentiment. While FFTY has its place in a portfolio during an upturn, it’s unsuitable for now, and the founder of Investor Business Daily would tell you himself.

Quick FFTY Breakdown

For a full list of holdings you can look here as of April. About 37% of the ETF is in commodities or in cyclical industries like logistics that has been driven by the commodity boom, rocketing earnings and sales of a host of companies. Naturally, barring perhaps the case of energy and fertilizers where geopolitical factors reign, commodities will eventually lose momentum and turn down. Indeed, in many industries that’s occurred. Steel, lumber come to mind. This is the problem with the IBD strategies. If you read Bill O’Neil’s book on CAN SLIM, you are told to sell out of potential bear markets by using technical analysis on major indices to track ‘distribution days’, or days of major decline and heavy volume. The IBD system for momentum that is rather captured by the FFTY is not meant for bear markets.

Indeed, the rest of the ETF is in tech, biotech and pharmaceuticals. Also the ETF employs leverage with about 25% of the total investment value financed by debt. With high betas, cyclicality that could easily turn now with employment on stilts, corporate spending possibly falling and consumer confidence already low, the issues with this committed momentum strategy in the current market should be obvious.

Remarks

We don’t have a problem with CAN SLIM. Part of the system is to look for an edge by covering innovators, or companies doing something differently, especially if it separates them from their peers. This tends to lead investors to pretty interesting mid-cap stocks. Granted, multiples tend not to matter for the CAN SLIM system, maybe the fund managers are more careful with this ETF which by the way is more actively managed, but it does create a good set of high growth stocks to ride the wave with.

Also, we are looking at information from April, perhaps they’ve sold out of the markets more meaningfully, also covering that quite meaningful leverage. Indeed, the CAN SLIM system would advise responding to signs of a sell-off by joining it. We don’t particularly approve of this reactive, chartist mentality, but to each their own. Perhaps all those steel holdings that have turned down are no longer in the portfolio (14% allocation), as well as other sensitive commodity industries. With locking in profits at some threshold, usually 20%, being a CAN SLIM staple, perhaps they got out before the grievous effects of the June sell-off, or maybe they accepted losses. Who is to say.

Nonetheless, investors should be aware that FFTY captures a momentum based system, probably quite a good one depending on who you ask about momentum. It even employed leverage as of April. With a lot of high beta, highly cycle sensitive commodity stocks in things like steel, think twice about this one. The increment in the market could easily be negative as rates continue to rise to beat down employment, and FFTY would respond to that a couple of times over. We’d watch out here.

While we don’t often do macroeconomic opinions, we do occasionally on our marketplace service here on Seeking Alpha, The Value Lab. We focus on long-only value ideas, where we try to find international mispriced equities and target a portfolio yield of about 4%. We’ve done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, us at the Value Lab might be of inspiration. Give our no-strings-attached free trial a try to see if it’s for you.