Systematic Relative Strength

Where is the ETF industry headed?  Tom Dorsey answers in this Q&A with IndexUniverse.

IU.com:In the first four months of 2013, asset gathering for U.S. ETFs was in the neighborhood of $64 billion, and on pace to beat 2012’s record of $188 billion. Are you surprised? Is the sky the limit? How far is this ETF juggernaut going to go?

Dorsey: Well, I don’t think the sky is going to be the limit. I don’t know that there are any more ETFs that anyone can bring out that will be the new fandango. The key word here is a phrase I coined: “ETF alchemy.”

IU.com:ETF alchemy?

Dorsey: Think about this for a second: If I take H₂ and I add O, what do I get?

IU.com:Water.

Dorsey: Yes, water. Each one of those two elements is separate. But when I combine the two, I come up with a substance—water—that you can’t live without. Each one separately is not as good as the two combined. And the concept here is, What’s out there in terms of ETFs I can combine together to make a better product?

Take for instance the Standard & Poor’s Low Volatility Index—and if you add that to PDP, which is our Technical Leaders Index, and combine the two, it’s like taking two glasses of water and pouring them into one bigger glass of water, 50-50. I end up with a better product than either one of them separately.

You’ll find this as we go along: the ability to combine different ETFs to create a better unit where the whole is better than the sum of its parts.

A little later in the interview, Tom Dorsey speaks to just how important the ETF has been to the industry:

IU.com:So that’s really the first ETF.

Dorsey: Yes, and I can’t tell you how many seminars I have taught to professionals on ETFs and the eyes that widen and the lives that change once they understand it and understand how to use it; it tells me we’re on the right path and this is the exact right product.

Like I’ve said to you before, it’s probably the most important product ever created in my 39 years in this business. And I believe back then when I talked to you that we’re in the first foot of a 26-mile marathon.

Dorsey Wright is the index provider for PDP.  For more information, please see www.powershares.com.

Paul Britt of IndexUniverse, after noting the strong inflows of the PowerShares DWA Technical Leaders ETF (PDP), had the following to say about its appeal:

In the end, PDP’s performance over more recent periods should bolster its appeal to those willing to take a bit more risk in search of more return.

This makes it a viable middle-ground alternative between purely passive super-low-cost ETFs like VTI and traditional actively managed mutual funds, which often come with higher costs.

Without a doubt, PDP is just one of many ETFs that offer an alternative to pure-vanilla U.S equity exposure.

But importantly, PDP stands out from many in this crowd, as its strong liquidity, hefty asset base and history of avoiding radical risk clearly suggest.

Britt also noted that turnover in the index last year was 96%.  As we discussed in our article Tax-Efficient Alpha, the combination of the tax-efficient ETF structure and our unique relative strength approach to indexing makes for a compelling investment solution.

See www.powershares.com for more information.  Past performance is no guarantee of future returns.

Want to know how important ETFs are to Dorsey Wright and to our entire industry?  Read this Q&A with IndexUniverse and Tom Dorsey.  Here’s the summary:

Tom Dorsey, president and founder of Dorsey Wright & Associates, can’t say enough positive things about ETFs. His business of point and figure technical analysis is now focused on ETFs, and their role in all that he does will only increase.

When IndexUniverse.com Managing Editor Olly Ludwig caught up with Dorsey on the sidelines of IndexUniverse’s Inside Trading ETFs conference last week at the New York Stock Exchange, Dorsey predicted that one of the four ETFs it created with Invesco PowerShares, the PowerShares DWA Technical Leaders Portfolio (NYSEArca: PDP), is likely to cross the $1 billion threshold sometime early next year.

That’s hardly a surprise to Dorsey, who considers the ETF the most important financial innovation in his 37-year career in the money management industry, and sees the development so far amounting to the first foot of a 26-mile marathon.

Tom Dorsey keynotes the IndexUniverse Conference:

Tom Dorsey, president of the investment advisory firm Dorsey Wright Associates, which specializes in technical analysis, said the exchange-traded fund looms largely as the biggest financial innovation of his 37-year career.

“The ETF is a game changer,” Dorsey told attendees at IndexUniverse’s inaugural “Inside ETFs Trading” conference today in New York, saying ETFs have given investors previously nonexistent opportunities to gain access to broad swaths of financial markets in an inexpensive and transparent package.

Dorsey, known for championing point and figure technical charting at Dorsey Wright since about 1987, spoke to the crowd of about 260 financial advisors about his methodology, and stressed that ETFs were now at the center of his firm’s business plan and would only grow in importance in the coming years.

“We’re in the first foot of a 26-mile marathon,” Dorsey said, arguing that most U.S. investors still aren’t aware of ETFs and, internationally, ETF market growth has barely gotten under way.

As the battle in the Emerging Markets space continues to heat up, Seeking Alpha highlights the favorable performance of PIE as compared to VWO:

Another fund that does not get the credit it deserves for being a thorn in VWO’s side is the PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE). The knock on PIE compared to VWO is fees. PIE charges 0.9% a year, but the ETF makes up for it. VWO has consistently lagged PIE by margins that are wide enough to justify paying up for the PowerShares offering. Over the past 12, 24, and 36 months and year to date, PIE has bested VWO. Over the past 36 months, PIE has delivered triple the returns of VWO and has been less volatile than the Vanguard fund over that time.

See www.powershares.com for more information.  Past performance is no guarantee of future returns.

Benzinga has a favorable review of DWAS, the PowerShares DWA Small-Cap Technical Leaders Index:

IWM’s recent ups and downs underscore the notion that there are other small-cap ETFs that could deliver more upside in a possible risk on rally. Consider these ETFs that have been outpacing IWM in recent months.

The PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS) debuted in July, but its rookie status is not what makes this fund unique. Rather than being a traditional cap-weighted ETF, DWAS evaluates relative strength characteristics of various stocks before including them in the fund. Dorsey Wright selects possible constituents “from a small-cap universe of approximately 2,000 of the smallest U.S. companies selected from a broader set of 3,000 companies,” according to PowerShares.

From there, DWAS is whittled down to 200 holdings. At the sector level, DWAS is heavy on discretionary, financial services, health care and technology names. Favorable seasonal trends for discretionary names have helped DWAS rise 0.86 percent in the past month. Over the past 90 days, the ETF is up 0.94 percent. IWM is down over both time periods.

For more information about DWAS, see www.powershares.com.  Potential for profits is accompanied by possibility of loss.

While this will probably surprise no one (who has been conscious over the past decade), it is still pretty fascinating.

Trends are everywhere.  You just need a plan to capitalize on them.

HT: Michael Kitces

Stoyan Bojinov of ETFdb on the PowerShares DWA Technical Leaders ETFs (PDP, PIE, PIZ, DWAS):

Countless investors have embraced ETFs in their portfolios thanks to the cost-efficient and easy-to-use nature of these financial instruments. Aside from serving as excellent core building blocks in long-term and retirement-themed portfolios, ETFs have also gained popularity among investors seeking out tactical exposure. One particular breed of products from industry veteran PowerShares has continued to slip under the radar for many, although a closer look under the hood reveals some attractive opportunities.

Invesco PowerShares offers a suite of “Technical Leaders” ETFs which target a number of popular asset classes with a twist; these products employ a proprietary methodology that allows them to sort through thousands of securities and narrow down their basket of holdings to only the ones which satisfy certain criteria. The result is a shallower portfolio that is deemed to hold only the strongest components from each respective universe based on relative performance measures.

Click here for the whole article and for the performance comparisons of the ETFs verses their benchmarks.

See www.powershares.com for more information.

MarketWatch’s Chuck Jaffe:

Years of working in the media have convinced me that a large measure of market talk about “what moved the market today” is hogwash. Truthfully, if the market moves by a percentage point or two on any given day, most pundits are taking nothing more than an educated guess as to what caused the move. They know their thinking —right or wrong — will be largely forgotten the next day, when there will be another opportunity to say something that sounds smart (thereby making the investment firm sound smart, no matter how accurate the information).

Thankfully, there are better alternatives to investing based on the daily opinions of journalists.