As shown in the relative strength chart below, small caps have had the upper hand compared to large caps for most of the last 15 years (the RS ratio is plotted in a column of X’s when small caps are outperforming large caps and shaded in green when small caps are on a PnF buy signal). However, I have to admit that I thought that 2014 (when small underperformed large by over 10 percent in the first three quarters of the year) would be an inflection point for this relative strength relationship and that large caps may take the baton. However, that is not really how it has played out. Small caps started outperforming large caps in the last couple months of 2014 and that outperformance of small caps has continued in the first half of 2015.
In fact, when you look at the head to head comparison of small caps versus large caps in each of the time periods below small caps have the advantage.
Source: Yahoo! Finance, as of 6/18/15. The performance is based on total returns, inclusive of dividends, but does not include all transaction costs. Investors cannot invest directly in an index. Indexes have no fees.
Given the favorable performance and relative strength of small caps, investors may very well be considering how to increase their exposure to this area. With that in mind, we wanted to review the methodology we use to construct the index for The PowerShares DWA Small Cap Momentum ETF (DWAS).
- Inception of DWAS was July 19, 2012
- Start with an investment universe of approximately 2,000 U.S. small cap stocks
- Use Point & Figure relative strength analysis to rank that universe of securities
- In order to qualify for the index, stocks must exhibit both near-term and longer-term favorable relative strength
- 200 stocks are selected for the index and are weighted by relative strength so that the stocks with the best relative strength get the most weight in the index
- There are no sector constraints
- The index is reconstituted on a quarterly basis
Source: Yahoo! Finance, as of 6/18/15. The performance is based on total returns, inclusive of dividends, but does not include all transaction costs.
See www.powershares.com for more information about the PowerShares DWA Small Cap Momentum Portfolio (DWAS).
This information has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This information does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov). Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
