What is DVLU? (Pros, Cons, and Strategies)
If you're considering diversifying your investment portfolio by blending momentum and value strategies, the DVLU ETF might be of interest. The First Trust Dorsey Wright Momentum & Value ETF, or DVLU, aims to provide exposure to U.S. companies displaying both strong momentum and desirable value characteristics. Investing in such an ETF may help you achieve a well-rounded portfolio that leverages both growth and stability. In this blog post, we’ll dive into what DVLU is, along with its benefits, drawbacks, and investment strategies.
What is DVLU?
DVLU is an ETF that filters and invests in U.S. companies exhibiting strong momentum and value traits. The ETF is managed by First Trust Advisors and follows the Dorsey Wright Momentum Plus Value Index. This index is designed to capture stocks that have favorable momentum trends while also representing good value based on traditional valuation metrics.
Unlike mainstream ETFs that focus either on value or momentum, DVLU uniquely blends both. By doing so, this ETF aims to capture the best of both worlds—growth potential from momentum and downside protection from value.
Key Features of DVLU
- Combines both value and momentum factors
- Targets U.S. stocks across multiple sectors
- Rebalances on a quarterly basis to maintain the desired factor exposures
The selection process involves evaluating companies based on their momentum scores, typically gauged through price performance metrics, and their value scores, which include valuation ratios like price-to-earnings and price-to-sales.
DVLU Composition
DVLU predominantly consists of mid to large-cap U.S. stocks spanning various sectors, including financials, consumer discretionary, healthcare, and industrials. This broad sector exposure contributes to the ETF’s diversified portfolio.
Top holdings in DVLU might include companies like MetLife (MET), General Motors (GM), Cigna (CI), and Johnson Controls (JCI). These firms are generally recognized for their strong market performance coupled with attractive value metrics.
Pros of DVLU
Balanced Exposure
DVLU offers a balanced approach to investing by blending momentum and value factors. This strategy can provide investors with the growth potential of momentum stocks while mitigating risks through value-oriented holdings, thus maintaining an equilibrium in market conditions.
Diversification
The ETF holds a diversified mix of companies across various sectors, which reduces sector-specific risks and enhances overall portfolio stability. Such diversification aids in protecting against market downturns in specific industries.
Quarterly Rebalancing
DVLU rebalances its portfolio quarterly to ensure it maintains its momentum and value criteria. This frequent rebalancing helps to lock in gains from momentum stocks and continuously filter out companies that no longer meet the value criteria, thereby optimizing the portfolio's performance.
Cons of DVLU
Higher Expense Ratio
Compared to ETFs like SCHD with very low expense ratios, DVLU comes with a higher cost. The current expense ratio stands around 0.65% annually, which may erode net returns over the long term.
Potentially Higher Volatility
While the value factor typically brings stability, the momentum factor can introduce volatility to the ETF. Investors may experience more significant price swings compared to traditional value-focused ETFs.
Sector Constraints
Despite its diversified nature, DVLU's sector allocation can sometimes be skewed depending on where the momentum and value factors are most prevalent. Periods of market shifts might lead to unintended sector overexposure.
DVLU Investment Strategies
Given its unique blend of value and momentum, DVLU can fit various investment strategies. Here are a couple of approaches to consider:
Long-term Investment Strategy
For those with a long-term investment horizon, DVLU can serve as a core holding. This strategy leverages the potential of capturing upward price trends while holding fundamentally sound companies, making it ideal for a minimum investment period of 5 to 10 years.
Tactical Allocation
Investors may also use DVLU as a tactical play in their portfolios. By periodically adjusting exposure to the ETF based on market conditions, one can aim to enhance returns or hedge against market volatility. For instance, in bullish phases, increasing DVLU exposure can capitalize on momentum-driven gains.
Combining with Other ETFs
Consider combining DVLU with other ETFs to tailor a diversified portfolio matching one’s risk tolerance and investment goals. For instance, pairing DVLU with a high-dividend ETF could balance growth with income, or combining it with a technology-focused ETF could counterbalance the lower exposure to high-growth sectors.
Conclusion
DVLU offers a compelling investment option by blending momentum and value factors, providing a unique mix of growth and stability. While it comes with certain drawbacks like a higher expense ratio and potentially higher volatility, its balanced exposure and frequent rebalancing make it a valuable addition to a diversified investment strategy. Properly managing DVLU can yield significant benefits, particularly for investors with a long-term outlook or those looking for a tactical asset allocation tool.
Consider your financial goals and risk tolerance before investing in DVLU, and as always, consult with a financial advisor to ensure it aligns with your broader investment strategy.