Factor-Based ETFs Growing in Popularity

January 2, 2013

Benzinga makes the case for factor-based ETFs and then uses the PowerShares DWA Developed Markets Index (PIZ) as an example:

A long-standing staple of the ETF business has been, and probably always will be to some extent, the passively managed index fund. An index fund, in most cases, is everything its name implies: A fund constructed using the securities of a specific index, be it the S&P 500, the MSCI Emerging Markets Index or another index.

Since most indexes are weighted by market capitalization, that means most index funds use cap-weighting methodology. Translation: The index’s largest holdings are usually those with the largest market value.

In terms of gathering assets, this approach has worked well for ETF sponsors, but as the industry has grown, savvy investors have sought out opportunities beyond traditional cap-weighting. Equal-weight ETFs have served as a popular avenue for investors looking to escape the cap-weighting rut.

Additionally, factor-based ETFs have increased in popularity. A simple definition of factor-based ETFs is that these funds are not quite actively managed per se, but they go far beyond the passive, cap-weighting routine by using growth, valuation and technical factors.

Obviously, investors will want to know if factor-based ETFs generate noteworthy returns relative to their cap-weighted rivals. In some cases, the answer is a resounding yes, so do not forget about these factor-based funds.

PowerShares DWA Developed Markets Technical Leaders Portfolio (NYSE: PIZ) PIZ is the developed markets equivalent of the popular PowerShares DWA Emerging Markets Technical Leaders Portfolio (NYSE: PIE).

PIZ excludes U.S.-based companies and its holdings (usually 100, but currently 104) can be domiciled in, but not limited to but not limited to Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

And like PIE, PIZ holds stocks that are displaying impressive relative strength traits. That does have a positive impact on returns. Year-to-date and over the past 12 and 36 months, PIZ’s underlying index, the Dorsey Wright Developed Markets Technical Leaders Index, has outpaced the MSCI EAFE Index and the MSCI EAFE Growth Index.

See www.powershares.com for more information about PIZ.

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Q1 2013 Technical Leaders

January 2, 2013

Each quarter, the PowerShares DWA Technical Leaders Indexes are reconstituted.  These indexes are designed to thoroughly evaluate their respective investment universes (U.S equities, Emerging Market equities, Developed International Market equities, and U.S. Small-Cap equities) and build an index of stocks with superior relative strength characteristics.   This quarter’s allocations are as follows:

pdp Q1 2013 Technical Leaders

pie Q1 2013 Technical Leaders

piz1 Q1 2013 Technical Leaders

dwas Q1 2013 Technical Leaders

Source: PowerShares, MSCI, and Standard & Poor’s

2012 was a year of big growth for the Technical Leaders ETFs and there is now over $1 billion in asset under management and licensing in PDP, PIE, PIZ, and DWAS.

See www.powershares.com for more information.

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High RS Diffusion Index

January 2, 2013

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 12/31/12.

diffusion 1.2.13 High RS Diffusion Index

The 10-day moving average of this indicator is 80% and the one-day reading is 86%.

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