Systematic Relative Strength

It was over a year ago now that we took our Technical Leaders Indexing methodology—used to build the suite of PowerShares DWA Momentum ETFs—down to the sector level. On February 19, 2014 Dorsey Wright became the index provider for the following 9 sector ETFs:

Quick facts about these Momentum Sector ETFs:

• PnF relative strength is used to select the holdings for these ETFs (click here for a white paper on PnF RS best practices)
• These ETFs can hold Small, Mid, and Large Cap U.S. stocks
• The number of holdings can range from 30-75. When Small and Mid caps have favorable relative strength, the number of holdings will tend to expand
• The indexes are rebalanced on a quarterly basis
• The members of the index are weighted by momentum so that the stocks with the best relative strength receive the most weight

With that background, we wanted to provide three ideas for how you might consider using these ETFs in your business.

1. Invest in these PowerShares DWA Sector Momentum ETFs in the context of the Dorsey Wright Power 4 Model. This is a guided ETF model where we rank all the sectors on a monthly basis and buy the top 4 ranked ETFs. Right now, this model currently owns Consumer Discretionary (PEZ), Industrials (PRN), Consumer Staples (PSL), and Healthcare (PTH). This model is unique in that it also has the ability to invest in cash in increments of 25%, 50%, 75%, or even 100% if cash becomes relatively highly ranked in our monthly ranking. Click here for more details of the Power 4 Model. Trade signals for this model can be received by subscribing to Dorsey Wright research (see www.dorseywright.com) or by being on the Monday PowerShares distribution list for current model holdings.
2. For those portfolio managers running their own sector rotation strategies, consider adding these 9 Momentum Sector ETFs to your existing universe. There are many subscribers to Dorsey Wright research who use our Matrix service to rank a universe of ETFs. Such a universe could include Cap-Weighted sectors as well as Momentum-Weighted sectors. Then, relative strength could be used to determine with which top 4-7 ETFs should be held and subsequently sold when they fall out of the top half/quartile of the ranks. An example is given below of taking the line-up of Vanguard sector ETFs and adding the PowerShares DWA Momentum Sectors.This example is presented for illustrative purposes only, and does not represent a past or present recommendation. Matrix as of 4/7/15.
3. Another way to consider using these sector ETFs is to technically evaluate them on a case-by-case basis. Current PnF charts are shown below for each of the PowerShares DWA Momentum Sector ETFs:

While the idea of sector rotation has been around for a very long time, the concept of doing that sector rotation with anything other than capitalization-weighted sectors is relatively new. We believe that incorporating Momentum sectors into the mix can open up new and effective ways to add value for your clients. It also provides a way for a financial advisor / portoflio manager to distinguish themselves from the competition.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Prior to Dorsey Wright becoming the index provider for this suite of sector ETFs on 2/19/14, the ETFs were managed using a different indexing methodology. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of clients of Dorsey, Wright & Associates, LLC. This article does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this article, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 4/2/2015:

This example is presented for illustrative purposes only and does not represent a past recommendation. The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

As of the close, 4/6/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

Current holdings of the DWA PowerShares Sector 4 Model are shown below:

Click here for model details.

The information contained herein 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 material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

The PowerShares DWA Sector Portfolios are calculated by NYSE Euronext or its affiliates (NYSE Euronext). The PowerShares DWA Sector Momentum ETFs, which are based on Dorsey Wright indexes, are not issued, endorsed, sold, or promoted by NYSE Euronext, and NYSE Euronext makes no representation regarding the advisability of investing in such product.

NYSE EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE DORSEY WRIGHT INDEXES OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

As of the close, 4/2/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

While the broad market was relatively flat in Q1, our Systematic RS portfolios generally did a good job of identifying the areas of market leadership. Sectors like Healthcare and Consumer Cyclicals led the way, while sectors like Energy and Utilities lagged. Our International portfolio once again outpaced its benchmark for the quarter. Detailed performance is shown below:

To receive the brochure for these portfolios, please e-mail [email protected] or call 626-535-0630. Click here to see the list of platforms where these separately managed accounts are currently available.

Total account performance shown is total return net of management fees for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. Information is from sources believed to be reliable, but no guarantee is made to its accuracy. This should not be considered a solicitation to buy or sell any security. Past performance should not be considered indicative of future results.

The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s. The Barclays Aggregate Bond Index is a broad base index, maintained by Barclays Capital, and is used to represent investment grade bonds being traded in the United States. The 60/40 benchmark is 60% S&P 500 Total Return Index and 40% Barclays Aggregate Bond Index. The MSCI EAFE Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada and is maintained by MSCI Barra. The Dow Jones Moderate Portfolio Index is a global asset allocation benchmark. 60% of the benchmark is represented equally with nine Dow Jones equity indexes. 40% of the benchmark is represented with five Barclays Capital fixed income indexes.

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. ETFs may result in the layering of fees as ETFs impose their own advisory and other fees. 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)

There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.

As of the close, 4/1/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

A little over 8 years ago, we teamed up with PowerShares to bring the first Momentum ETF to market. Today, we hit $2 billion! A huge thank you to all to have made this ETF a part of your portfolio.

Performance of PDP is shown below:

Source: Yahoo! Finance! Updated through 3/31/15. Inception to date (ITD*) is 3/1/07 – 3/31/15. Performance is inclusive of dividends, but does not include all transaction costs. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss. Dorsey Wright is the index provider for PDP. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.

The PowerShares DWA Momentum Indexes are reconstituted on a quarterly basis. These indexes are designed to evaluate their respective investment universes and build an index of stocks with superior relative strength characteristics. This quarter’s allocations are shown below.

PDP: PowerShares DWA Momentum ETF

Click here for a list of Q2 holdings for PDP.

DWAS: PowerShares DWA Small Cap Momentum ETF

Click here for a list of Q2 holdings for DWAS.

DWAQ: PowerShares DWA NASDAQ Momentum ETF

Click here for a list of Q2 holdings for DWAQ.

PIZ: PowerShares DWA Developed Markets Momentum ETF

Click here for a list of Q2 holdings for PIZ.

PIE: PowerShares DWA Emerging Markets Momentum ETF

Click here for a list of Q2 holdings for PIE.

Source: Dorsey Wright, MSCI, Standard & Poor’s, and NASDAQ, Allocations subject to change

We also apply this momentum-indexing methodology on a sector level:

Click here for a list of Q2 holdings for these sector momentum indexes.

See www.powershares.com for more information.

The Dorsey Wright SmallCap Momentum Index is calculated by Dow Jones, the marketing name and a licensed trademark of CME Group Index Services LLC (“CME Indexes”). “Dow Jones Indexes” is a service mark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Products based on the Dorsey Wright SmallCap Momentum IndexSM, are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s). A list of all holding for the trailing 12 months is available upon request. This example is presented for illustrative purposes only and does not represent a past recommendation. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. Dorsey Wright is the index provider for the suite of momentum ETFs with PowerShares.

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 3/31/15.

The 10-day moving average of this indicator is 84% and the one-day reading is 80%.

This example is presented for illustrative purposes only and does not represent a past recommendation. The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

As of the close, 3/31/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 3/30/15:

This example is presented for illustrative purposes only and does not represent a past recommendation. The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

As of the close, 3/30/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

As of the close, 3/27/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

As of the close, 3/26/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.

As of the close, 3/20/15:

Source: Yahoo! Finance

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. 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. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein. We are not soliciting any action based on this post. It is for the general information of readers of this blog. This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. Dorsey Wright & Associates is the index provider for the above ETFs.