Factor-Based ETFs: “A Growing Phenomenon”

Our Technical Leaders Indexes were prominently profiled in New Factor-Based Strategies Make ETFs Less Passive  by Rosalyn Retkwa in Institutional Investor magazine.

Exchange-traded funds increasingly seek to rebalance their portfolios without bastardizing the concept of passive investing.

The article also includes quotes by Tom Dorsey and Mike Moody:

Invesco PowerShares of Wheaton, Illinois, offers four ETFs based on the DWA Technical Leaders index created by Dorsey Wright & Associates of Richmond, Virginia. That index measures the relative strength or momentum in stocks to pick out the top 100 stocks in three categories — large- and midcap U.S. stocks (PDP), developed markets ex-U.S. (PIZ), and emerging markets (PIE) — and the top 200 small-cap stocks (DWAS). All four are reweighted quarterly.  “We could have chosen weekly or monthly, but quarterly worked out the best for us in our test,” says Tommy Dorsey, a principal in the firm, emphasizing that the selection of the “leaders” is all machine-driven, “with no human intervention. What’s taken out of the equation is human emotion. It’s all rules-activated.” Dorsey believes that ETFs “should stop short of being active and trying to compete with mutual funds,” because once they become actively managed, “you have that emotion, and that’s where the ETF has become bastardized,” he says.

But “people are experimenting and trying a lot of different things,” says Mike Moody, a senior portfolio manager at Dorsey Wright Money Management, the Pasadena, California–based asset management arm of the Richmond firm. “In just the last few years, there’s been an explosion with both academics and practitioners discussing how factor-based returns combine in a portfolio,” he says. “The dominant method for a long time has been characterizing equity through style boxes — small cap, large cap — and they’re all pretty highly correlated, but if you take that universe and you add in factors like low volatility and relative strength, they don’t have the same correlation,” he says.

See www.powershares.com for more information.

One Response to Factor-Based ETFs: “A Growing Phenomenon”

  1. […] by return factors as opposed to by style box.  Our criticism of style box investing is that, because style boxes tend to be highly correlated, the diversification benefits are limited.  Readers can click here to read different articles that […]