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Nasdaq’s Dorsey Wright Celebrates 10 Years Since First ETF (PDP) Launched Tied To Its Momentum Strategies .

Dorsey Wright & Associates (DWA), a Nasdaq Company, is known for its expertise in relative strength-based research along with point and figure charting

Nasdaq’s Dorsey Wright Celebrates 10 Years Since First ETF (PDP) Launched Tied To Its Momentum Strategies

By Chris Moyer / Product Development, Nasdaq Global Indexes

Dorsey Wright & Associates (DWA) ,a Nasdaq Company, is known for its expertise in relative strength-based research along with point and figure charting. DWA has upwards of 30 ETFs tracking its methodologies that have been packaged into indexes, all of which use some form of momentum ranking system for the underlying investment strategy. One of the long standing momentum ETFs in the line up is the PowerShares DWA Momentum Portfolio (ETF Ticker: PDP) that tracks the Dorsey Wright Technical Leaders Index (Index Ticker: DWTL). PDP just celebrated its 10-year anniversey (was originally launched March 1, 2007). PDP was the first momentum ETF to be launched and currently has around $1.4 Billion in AUM. On 3/1/17, it traded at a new all time high just shy of $46.00.

The investing process that DWTL adheres to is systematic in nature and uses relative strength to rank the holdings within the universe. Numerous studies show that having consistent exposure to the highest relative strength-ranked securities yields better investment results than exposure to poorly ranked securities. This entire process is part of Dorsey Wright’s proprietarily-built ranking methodology, which involves taking each member of the universe and ranking them against each other to determine which securities are winning the “arm wrestling” match in the market. These stronger performing securities are the members of the universe that will be part of the portfolio. The index, and therefore the fund, rebalances on a quarterly basis and holds the top 100 ranked holdings out of the universe. The consistent rebalance process helps make sure the portfolio stays allocated to those securities that continue to demonstrate leadership. Chart 1 depicts performance of DWTL vs SPX (S&P 500) over the last decade.

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DWTL: Point & Figure Chart – New All Time Highs

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Over the years a number of academic studies have shown, on a longer term basis, that momentum tends to outperform other factors such as value and growth. As markets cycle there are always going to be certain periods of underperformance for any factor. Typically a time period when momentum underperforms is off a bear market bottom or when there is lack of sustained leadership by a particular sector(s) of the market. On the other hand, when there is a dispersion amongst a given universe relative strength can take advantage by keeping the portfolio allocated towards those securities that are outperforming their peers. When analzying the below graph, we can certainly see some great examples of when DWTL has outperformed and also when it has underperformed. The most recent period of underperformance was in 2016 when there was a lack of sustained leadership in the U.S. equity markets. A prime example of this was the sharp rally the energy sector staged after the steep declines seen the previous year. This was one of the main reasons for the underperformance in 2016 given the fact most momentum portfolios had little to no exposure in energy to start the year. Thus far into 2017, momentum is off to a strong start so the previous trend of underperformance may be beginning to turn.

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DWTL – Allocations and Performance in 2017

Let’s fast forward to the current market environment in order to help give some perspective on how DTWL is performing so far this year. To begin, we will give a breakdown of current allocations as of 2/28/17. The largest allocations are currently Industrials (25%), Consumer Services (22%), and Financials (20%). The smallest allocations are in Utilties (3%) and Oil & Gas (1%).

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On a total return year-to-date basis DWTL was up +7.62% (as of 2/28/17) which compares quite favorably to the +5.94% from SPX. Thus far into 2017, DWTL is primarily being driven by Financials (+1.66%), Consumer Services (+1.17%), Industrials (+1.01%), and Technology (+1.25%). The only Industry with a negative contribution to return as of the end of February is Oil & Gas (-0.22%). In terms of individual holdings within Financials, MarketAxess Holdings has produced a total return of +27.89%, while Ameriprise was up +14.84%. The Technology sector saw strong gains from AMD (+26.51%) and Cadence Design (+20.84%). Healthcare saw strong returns from Idexx Laboratories (+25.00%). In Basic Materials, which was one of the underperforming areas of the portfolio, Consol Energy was down -15.10%. The Oil & Gas portion of the book was hurt by Cheasapeake Energy Corp which lost -22.14%.

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Conclusion

Many research studies over the years have shown that momentum outpeforms other factors such as value and growth. Here is a link to a repository of said research on the Dorsey Wright website: http://www.dorseywright.com/resources/documented-relative-strength-research. In the above research piece we stated momentum strategies typically do well during periods of sustained market leadership and also when there is dispersion among a universe of securities to which the portfolio can allocate. On the other hand, momentum tends to underperform during choppy or trendless markets. The PowerShares DWA Momentum Portfolio (ETF Ticker: PDP) that tracks the Dorsey Wright Technical Leaders Index (Index Ticker: DWTL) is a long standing momentum ETF that gives investors access to a systematic, rules-based investment methodology. PDP was the first momentum based ETF that launched and it just eclipsed its 10 year anniversey. Happy birthday, PDP!

Thus far into 2017 momentum has been outperforming other factors such as value and growth (as can be seen by DWTL outperforming Nasdaq’s US 500 Large Cap Value and Large Cap Growth Indexes by 2.79% and 1.05%, respectively). Based on the underperformance momentum experienced during 2016, the strong start to this year may be a sign momentum is coming back into favor.


To learn more about Nasdaq Global Indexes including our Dorsey Wright brand, visit our website or click here and a member of our team will contact you.
Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon. 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. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by Nasdaq or the information provider and Nasdaq and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. Nasdaq and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

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