First Trust Launches First ETF Based on IRP New Constructs’ Research

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Earlier this month, Wheaton Illinois-based fund manager First Trust filed a prospectus for the First Trust Bloomberg Core Earnings Leaders Index ETF.  This ETF is based on a proprietary measure of Core Earnings and Earnings Distortion produced by quantitatively oriented IRP, New Constructs’.

More On The New ETF

New Constructs will be providing its quality of core earnings analysis on the companies included in Bloomberg’s US 1000 Index.  Leveraging this data, Bloomberg will produce the new First Trust Bloomberg Core Earnings Leaders Index of the 100 leading companies.  The new ETF’s manager is Wheaton, Ill.-based First Trust Advisors, LP.

The top companies within each sector that have the highest ‘Earnings Capture’ metric are eligible for inclusion for a total of 100 companies in the Index. The Earnings Capture metric aims to assess the difference between ‘Core Earnings’ and reported earnings as a percent of each company’s total assets.

New Constructs determines Core Earnings by using its AI-based Robo Analyst technology to review company filings and identifying non-core and non-recurring gains and losses. These gains and losses are identified using the company’s proprietary technology combined with expert analyst review of items reported on the income statement (pre-tax and after-tax), as well as hidden items found only in the footnotes and management discussion and analysis. Additionally, the relevant tax consequences of making such adjustments are included in the determination of Core Earnings.

About New Constructs

Founded in 2002, by former Credit Suisse First Boston investment research analyst David Trainer, New Constructs leverages proprietary software, enabling a team of qualified forensic accountants and financial analysts to regularly analyze the SEC filings and footnotes for thousands of companies in order to identify material accounting anomalies that distort these companies’ income statements.

Over the years, New Constructs has developed what it calls its ‘Robo-Analyst’ offering as “the world’s only parsing technology capable of reviewing every 10K and 10Q filing for SEC.gov.”   The firm says it extracts data from hundreds of documents daily and is scalable to tens of thousands.  The technology is built on a database of 120,000+ human-verified parsed filings and 40,000 models and investment ratings covering the past 15 years. Teaching machines to learn from the human-parsed filings, the modeled results and ratings is the key to success, says Trainer. That “experience” informs the technology as it filters through the unstructured data in financial flings to uncover and tag data from the MD&A, Financial Statements, and the footnotes; from tables, paragraphs, or other text.

This analytic process allows New Constructs to create adjusted fundamental data, earnings quality and valuation models, company ratings and research reports for more than 3,000+ stocks, 400+ ETFs and 7,000+ mutual funds.

Our Take

While a number of research firms have tried to get into the business of developing ETFs and other investment products over the years, very few have achieved sustainable success.  One of the most prominent IRPs to build up these products has been Dorsey Wright  & Associates that was sold to NASDAQ in 2015 for $225 million.  The primary reason the firm received such a healthy price tag was due to the array of 17 ETFs, UITs and other investable products with close to $6 billion in AUM the firm developed and launched over the years.

However, other IRPs have also had varying degrees of success in the space including GaveKal, TrimTabs, Sabrient, Ned Davis Research, and Argus Research.  In fact, a few of these firms have been able to generate millions of dollars in fees annually from these endeavors – enough to make selling their research to institutional investors a secondary revenue stream.  For example, Santa Barbara California-based quantitative research firm Sabrient Systems built and launched a series of UIT and ETF products attracting billions of dollars in AUM over the years with their various indices and investment products.

The launch of the First Trust Bloomberg Core Earnings Leaders Index ETF is the first investment product that has been based on New Constructs’ proprietary research.  However, based on various academic studies, New Constructs “core earnings” metric is an extremely predictive measure.  According to an academic study conducted in 2019 by professors Ethan Rouen and Charles C.Y. Wang of Harvard Business School, and Eric So of MIT’s Sloan School of Management, New Constructs’ Core Earnings metric is a more accurate measure of a firm’s current and future performance than is provided by any other traditional fundamental data provider.

We suspect that once the First Trust Bloomberg ETF starts to gain traction, and other ETF sponsors learn about the proven value of New Constructs’ research around “core earnings”, we should see a growing number of investment products based on New Constructs’ research.

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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