Emerging Markets ETFs

March 21, 2013

Morningstar came out with a piece yesterday titled Are There Better Emerging-Markets ETF Choices?  The article discussed the availability of alternative beta funds in the area, and had this to say, in part, about momentum:

While there has been relatively little academic research done on momentum in emerging-markets stocks, it has been observed in this asset class. There is currently one ETF that looks to capitalize on momentum in emerging-markets stocks–PowerShares DWA Emerging Markets (PIE), which was launched in December 2007. Over the five year period ending Feb. 28, 2013, this fund’s benchmark index produced annualized returns that outstripped the MSCI Emerging Markets Index by 155 basis points while exhibiting fairly similar levels of volatility.

Risk-tolerant investors looking for more growth-oriented exposure to emerging markets may want to consider PIE; it is currently the only emerging-markets ETF of reasonable size to provide a growth tilt.

The article also discusses some of the funds that offer low-volatility exposure, but did not mention that the low-vol and high relative strength return factors often complement one another nicely.  In the domestic market, we’ve seen that these factors have excess returns that are negatively correlated.  Although usage of low volatility in emerging markets has a much shorter history, it’s possible that we’ll see the same thing there over time.

It’s nice to see Morningstar give relative strength some attention!

Source: Yahoo! Finance

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

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PowerShares Dorsey Wright ETFs Reach $1B

January 16, 2013

IndexUniverse highlights a significant milestone for the PowerShares Dorsey Wright Technical Leaders ETFs:

PowerShares, the No. 4 U.S. ETF firm by assets, today trumpeted the fact that the four ETFs it, along with technical-analysis guru Tom Dorsey, brought to market beginning almost six years ago together now have more than $1 billion in assets under management.

Almost three-quarters of those assets are in the oldest of the quintet, the $771 million PowerShares DWA Technical Leaders Portfolio (PDP), which outperformed the S&P 500 Index last year, PowerShares said today in a press release.

The four portfolios make use of the “point and figure” relative strength technical analysis Dorsey and his firm Dorsey Wright & Associates have championed for 25 years. The funds are part of the ETF world that is focused on so-called strategy indexing that amounts to an attempt to outperform—in a rules-based, quasi-active way—the broader market, as measured by capitalization-weighted indexes like the S&P.

The four funds, their launch dates, and their assets are as follows:

  • PowerShares DWA Technical Leaders Portfolio (PDP), March 2007, $771.0 million
  • PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE), December 2007, $275.9 million
  • PowerShares DWA Developed Markets Technical Leaders Portfolio (PIZ), December 2007, $132.3 million
  • PowerShares DWA SmallCap Technical Leader s Portfolio (DWAS), July 2012, $18.1 million

PDP, the granddaddy of the four funds, returned 17.87 percent last year compared with the S&P 500’s 16 percent, PowerShares said.

The Wheaton, Ill.-based fund company also said the fund has risen 14.93 percent in the past three years, compared with 10.86 percent for the S&P.

“It was a big deal when Dorsey Wright and Invesco PowerShares introduced the Technical Leaders ETFs beginning in 2007; it really gave investors a new way to implement relative strength strategies,” Tom Dorsey said in the press release.

“We believe that money managers will increasingly seek out well-designed alpha-seeking investments like the PowerShares DWA Technical Leaders ETFs that have demonstrated the potential to improve portfolio performance.”

We at Dorsey, Wright & Associates are very proud to have reached this significant milestone, and want to thank all of you, our clients, for your support of these robust relative strength-based ETF solutions.

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

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Checking In On PDP

August 30, 2012

So far, 2012 has been an excellent year for the PowerShares DWA Technical Leaders Index (PDP).   Year-to-date, PDP is +14.94%, while the S&P 500 is +12.16%.  PDP, which began trading on March 1, 2007, is a big source of pride for our firm as it has outperformed its benchmark in every year since its inception except for one.  For those unfamiliar with the strategy, the index is comprised of 100 high relative strength stocks and is reconstituted on a quarterly basis.

In every quarterly reconstitution there are stocks that come and stocks that go.  Those that retain their strong relative strength stay, and those that have deteriorated are replaced.  Interestingly, there are a number of stocks that have remained in the index since its inception over five years ago, including Apple Computer.

As shown above, the S&P 500 (red line) has gone nowhere, while Apple Computer (blue line) has powered higher.  Apple is currently the biggest weight in the index:

Obviously, not all of our holdings work out as well as Apple.  However, capturing a few of these big winners can make a big difference.

As we announced just a short time ago, our Technical Leaders Index family was recently expanded to include DWAS, the PowerShares DWA Small-Cap Technical Leaders Index.  Now, it is a family of four: PDP, PIE, PIZ, and DWAS.

See www.powershares.com for more information.  Past performance is no guarantee of future returns.  A list of all holdings for the last 12 months is available upon request.

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Introducing the PowerShares DWA Small Cap Technical Leaders Portfolio (DWAS)

July 19, 2012

We are pleased to announce the listing of the PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS) on the NYSE Arca today. This new Fund launches under the NYSE ticker DWAS and represents the first US small-cap ETF based on the concept of relative strength ranking. The PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS) becomes the 4th ETF that Invesco PowerShares has listed based on our “Technical Leaders” indexing strategy since 2007. We are proud to once again partner with PowerShares, who long ago supported the proliferation of “Intelligent Indexing” strategies within ETFs, and would like to share some of the details of this new product with our clients today.

Related Documents

Invesco PowerShares Press Release Regarding DWAS: here

DWA Small Cap Technical Leaders Portfolio Prospectus: here

What are “Technical Leaders”?

Technical Leaders are companies identified by a DWA selection methodology that possess strong relative strength characteristics compared to their peers and industry benchmarks. The existing “Technical Leaders” products have attracted $750 million in assets under management as of June 30, 2012. The current lineup of DWA Technical Leaders products includes:

Technical Leaders Family of ETFs

  • PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS)
  • PowerShares DWA Technical Leaders Portfolio (PDP)
  • PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE)
  • PowerShares DWA Developed Markets Technical Leaders Portfolio (PIZ)

What is the PowerShares DWA Small Cap Technical Leaders Portfolio (DWAS)?

The PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS) is based on the Dorsey Wright SmallCap Technical Leaders Index. The Fund generally will invest at least 90% of its total assets in equity securities of small capitalization companies that comprise the Underlying Index. The Index includes approximately 200 companies pursuant to a proprietary selection methodology that is designed to identify companies that demonstrate powerful relative strength characteristics from a small-cap universe of approximately 2,000 US-listed companies. The Fund is rebalanced and reconstituted quarterly, and operates with an expense ratio of 0.60%.

What is the DWA Small Cap Technical Leaders Index?

The DWA Small Cap Technical Leaders Index is a rules-basedUSequity index developed by Dorsey, Wright and Associates. The index is designed to remain “fully-invested” at all times within approximately 200 US-listed companies, which are selected from a universe of approximately 2,000 US Small Cap companies. This 2,000 stock initial inventory is created as a sub-set of a broaderUSequity pool including approximately 3,000 US-listed securities. DWA employs a proprietary selection methodology built upon a systematic application of relative strength. The methodology is responsible for evaluating all potential investments, ranking them by means of relative strength, and then selecting and weighting them based upon their relative strength ranking. At its core, our process is simply designed to identify companies that demonstrate powerful relative strength characteristics against their peers within a very broad inventory of US small cap securities. We believe this index construction process is robust in its ability to identify stable leadership trends, and adaptive in its ability to rotate as market trends themselves change within the US Small Cap Equity investment category.

How is DWAS different from other US Small Cap Products?

There are of course a number of differences between our new Small Cap Technical Leaders product and existing US Small Cap ETFs. First and foremost, DWAS is not designed to be a “beta” product that seeks to provide broad exposure to the entirety of the US Small Cap investment category through a cap-weighted or equal-weighted indexing approach. A number of products currently exist to satisfy such investment targets, most popularly the iShares Russell 2000 Index Fund (IWM) and iShares S&P 600 Index Fund (IJR), which are both among the 20 largest (by AUM) US equity-based ETFs with more than $20 billion in assets between them. While these funds employ a cap-weighted indexing approach, while the Guggenheim Russell 2000 Equal Weight ETF (EWRS) is an equal-weighted product with similar holdings to IWM. Shares of DWAS are not designed to provide a “beta” alternative to such existing products, but rather access to a more refined category of High Relative Strength securities within a similar inventory as those funds. At any point in time shares of DWAS will likely own about 10% of the securities held within a fund such as IWM, and will hold them in very different quantities, as weightings are driven by strength rather than size.

Furthermore, DWAS is built on the back of an index that can rotate its exposure as needed on a quarterly basis. This creates an adaptive characteristic of the fund that will naturally produce sector weightings often quite a bit different than that of the traditional “beta” products in the US Small Cap space. For instance, the current Technical Leaders index weightings produce quite a bit more exposure to Small Cap Healthcare than does the Russell 2000 Index (21% vs. 12%) while underweighting Small Cap Energy (1% vs. 5%). These sector weights are of course dynamic as well, with Healthcare and Energy having had very similar weightings as recently as 15 months ago within our Tech Leaders index, but shifting surely and steadily in the time since. DWAS does not seek to own all of US Small Cap, but rather to provide efficient access to the existing leadership within US Small Cap.

Please see www.powershares.com for more information.  A list of all holdings for the trailing 12 months is available upon request.  The Dorsey Wright SmallCap Technical Leaders 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 Technical Leaders 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).

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Emerging Markets Investing

May 23, 2012

Index Universe has an article pointing out that simply buying a large, cap-weighted index might not be the way to go in emerging markets.  For one thing, China, Brazil, South Korea, Taiwan are 60% of the fund.  The article discusses potential problems in some of the BRIC markets, and then proceeds to pick out a bunch of promising countries like Poland, Turkey, and Indonesia.

Personally, I suspect that buying a large cap-weighted index and then hoping for the best was never a very viable strategy.  Perhaps it happened to work out over certain time periods, but things change and different economies can have really different stock market performance.  And I have to say that I don’t have a lot of confidence in analyst’s guesses either, although I’m sure they know a lot more about the fundamentals of overseas economies than I do.

Here’s a thought: let relative strength sort out where you should be investing.  For example, here’s the current country breakdown for the DWA Emerging Markets Technical Leaders Index, as seen through the holdings of PIE, the Powershares ETF based on the index:

Source: Powershares (data as of 3/31/2012)

Malaysia, Mexico, and Indonesia are the largest weights right now—and those weights are based entirely on the objective performance of the underlying stocks in the market, not on someone’s opinion about what market will be good.  When performance changes, the weights will change, often substantially.  As an investor, you don’t have to contemplate whether or when the Czech Republic might outperform India.  The weights change quarterly without you having to worry about it.

Relative strength is a different, and dynamic, way of investing globally.

See www.powershares.com for more information about PDP, PIE and PIZ.  Past performance is no guarantee of future returns.  A list of all holdings for the trailing 12 months is available upon request.

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Navigating the ETF Galaxy

May 15, 2012

ETFdb describes the growing ETF universe as follows:

At times, it seems as if the number of ETFs available to U.S. investors will soon exceed the number of stars in the sky. That might be overstating things a bit, but the pace of expansion in the ETF industry has truly been impressive over the last several years. With multiple products seemingly debuting every week and very few shutting down (despite countless predictions to the contrary), the size of the ETF lineup has effectively doubled in a relatively short period of time. And there’s no indication that the product development front is going to be slowing down any time soon; issuers continue to file for both innovative and duplicative products, producing a pipeline full of hundreds of funds that could debut at some point in the next several months.

The proliferation of ETFs, ETNs, and other exchange-traded cousins of these vehicles is, in many ways, a very positive development for investors. There are now ETPs for just about every investment objective, ranging from the very broad and very straightforward to the hyper-targeted and rather complex. And many of the more recent additions to the ETF lineup have further “democratized” the business of investing, delivering cheap and easy access to sophisticated strategies that would otherwise be time consuming and expensive to implement.

My emphasis added.  Up to this point, I wholeheartedly agree–the expansion of the ETF universe has been extremely beneficial to investors.  It has also played right into our hands here at Dorsey Wright because it has provided a very tax-efficient means of getting exposure to relative strength (See PDP, PIE, and PIZ).  Furthermore, the expansion of the ETF universe has enabled us to provide innovative global tactical asset allocation strategies (See DWAFX and DWTFX) where we can efficiently get exposure to a wide variety of global asset classes.

However, ETFdb then states the following:

But the growth spurt for the industry has also made it increasingly difficult to navigate. Moreover, the tremendous variance in level of sophistication and risk tolerance among ETFs can set the stage for confusion and potentially lead to a less-than-ideal experience with ETFs.

That last part is only true if there is no framework for efficiently and thoroughly evaluating each of the ETFs.  Without such a framework then, yes, I can certainly understand why some find it “increasingly difficult to navigate.”  However, within the context of a relative strength model, more choices are potentially a good thing.  The more options for finding uncorrelated returns, the more likely it is that a global tactical asset allocation strategy can generate favorable returns in a variety of market environments.  Furthermore, relative strength models evaluate each member of the universe in a systematic fashion and only allocate if dictated by the relative strength rank–a true meritocracy!

Source: Wikipedia

See www.powershares.com and www.arrowfunds.com.

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