10 Fun Facts about the PowerShares DWA ETF Rebalances

December 26, 2014

Each quarter, we reconstitute the 14 PowerShares Momentum Indexes for which we are the index provider. With the next rebalance upon us, we wanted to provide some insight into these indexes.

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Click here for fact sheets

  1. The number of stocks in each index is 100 for PDP, PIE, PIZ, and DWAQ; 200 for DWAS, and 30-75 for each of the sector ETFs
  2. Point & Figure relative strength rankings are used to determine which stocks quality for the index each quarter
  3. Rather than equal-weight the index, those stocks with the best relative strength, according to our rankings, receive the most weight in the index
  4. The first of these ETFs, PDP, was introduced on March 1, 2007; PIE and PIZ were introduced on December 28, 2007; DWAS was introduced on July 7, 2012, and DWA was hired to be the index provider for the other 10 on February 18, 2014
  5. None of these ETFs have paid any capital gains distributions since inception (although this is no guarantee that they won’t in the future)
  6. For the international ETFs (PIE and PIZ), the investment universe consists of both ordinaries and ADRs. When we do our rankings for international stocks we do the analysis on a USD price (not local price). As a result, any currency fluctuations are taken into account when we convert the local daily prices to dollars.
  7. The investment universe for DWAQ is essentially the top 1000 market cap names that trade on the NASDAQ
  8. There are no sector constraints in PDP, DWAQ, or DWAS. There are no country or sector constraints in PIE or PIZ.
  9. The investment universe for the sector indexes includes small, mid, and large cap stocks
  10. Once stocks are selected to be in the index, they will only stay as long as they retain sufficiently strong momentum. We have had stocks stay in the index for anywhere from 1 quarter to more than 15 quarters.

Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Dorsey Wright is the index provider for these 14 momentum ETFs.

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Global Macro: In Case Your Time Horizon Is Not 45 Years

December 12, 2014

Cliff Asness recently posted an excellent review of Modern Portfolio Theory (MPT) that included some very interesting charts of the return and volatility of stocks, bond, and commodities from 1970-November 2014. Over this 45-year period of time the efficient frontier of those three asset classes was as follows:

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Probably, what most would expect. Stocks had higher returns than bonds and commodities, with more volatility than bonds, but less volatility than commodities. Nothing too shocking in that picture. However, the fun really starts when you look at the efficient frontier in 5-year increments:

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Pretty shocking, huh! The long-term (45-year in this case) average returns and volatility of stocks, bonds, and commodities tell you very little about their return and volatility characteristics in any 5-year period. Stay the course, focus on the long term, don’t sweat the small stuff, don’t make knee-jerk reactions…all those maxims aren’t going to work with your clients. Those aren’t calming to a client, they are offensive! Imagine saying that to a 65-year old investor who has just retired. This investor sits down with you, their trusted financial advisor, and takes a look at their entire portfolio. This is all they have. This client is not planning on going back to work. They have worked hard to amass this money and they need it to work for them for the next few decades of their life. If their portfolio has a devastating 5 or 10 years this is not just an inconvenience for them, this will degrade their standard of living in a major way.

This is why we are big advocates of global tactical asset allocation. Expand the investment universe to include not just U.S. Stocks, U.S. Bonds, and Commodities, but also Real Estate, International Equities, Currencies, and even Inverse Equities. The table below shows just how flexible our Global Macro portfolio can be. We believe that this type of flexibility is prudent given the significant variability on display in the above efficient frontiers.

exposure-ranges

To learn more about this relative strength-driven approach to global asset allocation, click here for a fact sheet. This portfolio is available on the Masters and DMA platforms at Wells Fargo Advisors and on SMA platforms at many other firms. The strategy is also available as The Arrow DWA Tactical Fund (DWTFX and DWAT).

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.arrowfunds.com for more information. Click here for disclosures.

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