With all the talk of 2015 being a flat year in the U.S. equity markets, it is worth remembering that while that may be true of many of the broad benchmarks, like the S&P; 500, it is not true when you look at the dispersion in returns of a broader universe of individual stocks.
Consider the YTD performance of the 2,843 stocks in the NASDAQ US Benchmark Index:
Source: Nasdaq, Performance through 8/18/15, Price return only, not inclusive of dividends
The highest performer in this universe is up 341% YTD and the worst performer has lost 95% of its value so far this year. However, the capitalization-weighted NASDAQ US Benchmark Index is up 2.09% for the year–close to flat.
Part of the reason that we are such fans of Momentum investing is that it allows us to seek to capitalize on this dispersion. 2015 has generally been a good year for Momentum strategies because leadership has been relatively stable for much of the year. One ETF which Dorsey Wright provides the index for is the PowerShares DWA NASDAQ Momentum Index (DWAQ). See below for the description of this index:
The PowerShares DWA NASDAQ Momentum Portfolio (Fund) is based on the Dorsey Wright® NASDAQ Technical Leaders Index (DWA NASDAQ Technical Leaders Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is chosen from a universe of approximately 1,000 common stocks having the largest market capitalizations from the NASDAQ US Benchmark Index. All securities in the universe are ranked using a proprietary relative strength (momentum) measure. Each security’s score is based on intermediate and long-term price movements relative to a representative market benchmark and the other eligible securities. The top 100 securities are selected for the Index. The Fund and the Index are rebalanced and reconstituted quarterly.
DWAQ’s YTD Performance is shown below:
Source: Dorsey Wright, as of 8/18/15, Price return only, not inclusive of dividends
If you look under the hood of broad market indexes, you are likely to find plenty of dispersion. We think Momentum is an effective way to capitalize on that dispersion.
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 DWAQ and a suite of other Momentum ETFs at PowerShares. See www.powershares.com for more information.
