The Final Four: New ETF Focuses On Four Momentum Funds
The momentum factor has delivered surprising out-performance of its value rival this year, and there is no shortage of momentum-based exchange-traded funds investors can use to exploit that trend.
Also, there is a new kid on the block worth considering.
The PowerShares DWA Tactical Sector Rotation Portfolio (NASDAQ: DWTR) debuted Friday, becoming the latest in a long line of PowerShares ETFs backed by Dorsey Wright's widely followed, momentum-based methodology.
Illinois-based PowerShares is a unit of Invesco Ltd. (NYSE: IVZ), and is the fourth-largest U.S. ETF issuer.
DWTR tracks the Dorsey Wright Sector 4 Index, which “is designed to gain exposure to the strongest relative strength sectors in the US through the universe of nine PowerShares DWA sector Momentum ETFs,” according to PowerShares.
In plain English, that means DWTR is an ETF of ETFs, and the funds held by the new ETF are other PowerShares ETFs that follow Dorsey Wright indices.
The four ETFs currently held by DWTR range in weight from 21.4 percent to almost 27.9 percent. DWTR's holdings are as follows: The PowerShares Dynamic Consumer Sta. (ETF) (NYSE: PSL), PowerShares Dynamic Consumer Disc. (ETF) (NYSE: PEZ), PowerShares Dynamic Healthcare Sec (ETF) (NYSE: PTH) and the PowerShares Dynamic Tech Sec (ETF) (NYSE: PTF).
Last year, PowerShares transitioned nine sector ETFs to Dorsey Wright momentum indices, including the four aforementioned ETFs that comprise the new DWTR's lineup.
As one example, PSL, 2015's top-performing consumer staples ETF, follows the Dorsey Wright Consumer Staples Technical Leaders Index, a benchmark that “is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 common stocks from the NASDAQ US Benchmark Index,” according to PowerShares.
PowerShares And Dorsey Wright Indices
The nine PowerShares sector ETFs that follow Dorsey Wright indices make up the universe from which DWTR's holdings can come from.
“The Index contains a cash element to maximize the impact of the momentum factor. The Index holds only the four strongest of the nine sectors based on relative strength indicators, while the portfolios underlying the sectors implement a methodology that weights constituents based upon price momentum instead of traditional market capitalization. Momentum investing may include securities which are more volatile than the market as a whole, and can produce returns less than other investment style,” according to PowerShares.
DWTR's index evaluates sector rankings monthly. If a sector falls out of the top four, it is sold and replaced by the highest-ranking sector not currently in the index. The new ETF came to market well-heeled with $25 million in assets. DWTR charges 0.75 percent per year, or $75 for every $10,000 invested.
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