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Momentum Is Working At The Sector Level

October 26, 2015 1:30 pm
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Throughout 2015, investors have heard plenty about the momentum factor outperforming its value counterpart. Exchange traded funds easily prove as much. For example, the $947.7 million iShares MSCI USA Momentum Factor ETF (NYSE: MTUM) is up nearly six percent while the S&P 500 is higher by just 0.8 percent year-to-date.


Logically speaking, it is not surprising that the momentum factor's out-performance of other investment factors extends to the sector level. At least four of this year's top 10 non-leveraged sector ETFs can be considered momentum funds and six of the nine PowerShares sector ETFs that follow momentum-based Dorsey Wright indexes are outperforming their cap-weighted counterparts, according to Dorsey Wright data. 


That includes the PowerShares DWA Consumer Staples Momentum Portfolio (NYSE: PSL). PSL, this year's top-performing consumer staples ETF, is up nearly 12 percent on the year. Last year, PowerShares, the fourth-largest U.S. ETF sponsor, transitioned 10 ETFs, including nine sector funds, to Dorsey Wright momentum benchmarks


Many cap-weighted sector funds are relegated to holding only large-caps, perhaps with sprinkles of mid- and small-caps, but the PowerShares sector funds can include all three cap spectrums.


“Also, keep in mind that the number of stocks in each momentum sector ETF can range from approximately 30-75. When small caps have better relative strength we will tend to have more holdings and when large caps are in favor we will tend to have fewer holdings,” notes Dorsey Wright


In addition to PSL, other examples of out-performing PowerShares sector funds include the PowerShares DWA Momentum Technology Portfolio (NYSE: PTF) and the PowerShares DWA Financial Momentum Portfolio (NYSE: PFI). Though PTF, the technology fund, features exposure to some of that sector's most familiar large-caps, the ETF allocates just 19.2 percent of its weight to large stocks.


A solution exists for investors looking to gain access to multiple momentum-based sector ETFs under one umbrella. The PowerShares DWA Tactical Sector Rotation Portfolio (NASDAQ: DWTR), which debuted earlier this month, is an ETF of ETFs that holds the four PowerShares sector ETFs tracking DWA indexes currently displaying the best relative strength characteristics


The aforementioned PSL and PTF combine for nearly half of DWTR's weight. Advisors and investors have quickly warmed to DWTR's story as the ETF is just two weeks with $30.7 million in assets under management.

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