“Under the Microscope: Powershares DWA Technical Leaders ETF,” Seeking Alpha, 3/31/2010:
While the ETF world started by focusing on tracking well known indexes such as the S&P 500, it has significantly branched out in recent years, giving investors funds tracking everything from commodity indexes to quantitative methodologies that attempt to deliver excess returns. These quant ETFs haven’t really hit it big yet, but have certainly attracted a fair amount of assets from investors who still believe in the benefits of stock analysis but are also eager to reap the benefits of the ETF structure. One interesting marriage is found in the PowerShares DWA Technical Leaders Portfolio ETF (PDP), a fund that offers access to a strategy that buys and sell securities based on chart patterns and other technical indicators such as relative strength levels.
Relative strength focuses on the idea that stocks showing high relative strength compared to broader indexes are likely to continue increasing in price, and it is better to buy those stocks than to buy stocks with falling prices. In other words, “[Prices] are never too high to begin buying or too low to begin selling,” according to Jessie Livermore. Relative strength investing is a relatively simple strategy, but there is ongoing debate over how the strength should be calculated and the effectiveness of such a strategy in an era when markets are more efficient than ever.
PDP tracks the Dorsey Wright Technical Leaders Index, which includes approximately 100 U.S.-listed companies that demonstrate powerful relative strength characteristics. The index is constructed pursuant to Dorsey Wright’s proprietary methodology, which takes into account the performance of each of the 3,000 largest U.S.-listed companies as compared to a benchmark index, and the relative performance of industry sectors and sub-sectors. Dorsey Wright believes that relative strength is a “very robust and adaptable stock selection method.” Furthermore, the firm states that its process for selecting stocks in the portfolio is “100% systematic” and that they “do not discuss what [they] think should be included or excluded from the portfolio. The systematic process determines the securities and weights, and [they] follow it without question.”
It is nice to see PDP getting a little buzz. It is up 9.99% YTD compared to 5.22% for the S&P 500 (1/1/2010 - 3/30/2010).
