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2 Factors That Worked In The First Quarter

April 17, 2017 8:15 am
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The value factor is again receiving increased attention, but it was not particularly exhilarating for investors in the first quarter of 2017. And with volatility relatively benign, the low volatility and quality factors did not set the investment world ablaze in the first three months of the year.

As has been widely documented, U.S. small-cap equities and exchange-traded funds have been struggling to start this year, so the size factor was something of a first-quarter dud as well.

First-Quarter Success

The factors that really worked in the first quarter include growth and momentum.

“Conversely, the growth and momentum factors rebounded from a poor performance in the fourth quarter of 2016. The Russell Top 200 Pure Growth Index benefited from limited exposure to energy and financials, as well as its holdings in well-performing consumer discretionary stocks,” said PowerShares in a recent note.

ETFs rooted in momentum strategies, such as the PowerShares DWA Tactical Sector Rotation Portfolio (NASDAQ:DWTR), are still looking for firmer footing. DWTR is down 1.7 percent year-to-date. 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.

More On Momentum

“Momentum stocks underperformed last quarter, but experienced some mean reversion over the past few months,” said PowerShares. “Why? The macro backdrop of continued economic growth and limited volatility may have created a favorable environment for momentum stocks by allowing investors to focus on company fundamentals and longer-term trends. Momentum stocks also benefited from low correlation among stocks. (Low stock correlation is often a sign that equity investors are focused more on individual company fundamentals than market conditions. This scenario typically benefits the momentum factor, which needs dispersion in returns and stable market leadership for success.)”

What’s In DWTR?

The four PowerShares sector ETFs held by DWTR are the PowerShares DWA Industrials Momentum Portfolio (ETF) (NASDAQ:PRN), PowerShares DWA Technology Momentum Portfolio (NASDAQ:PTF), PowerShares DWA Financial Portfolio (NASDAQ:PFI) and the PowerShares DWA Utilities Momentum Portfolio (NASDAQ:PUI).

The market capitalization composition of those ETFs means DWTR is far from a large-cap ETF. In fact, over three-quarters of the ETF's weight is allocated to mid- and small-cap stocks via the aforementioned quartet of sector funds.

DWTR has trailed the Russell 3000 Index since coming to market in the fourth quarter of 2015, according to issuer data.

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