With Federal Reserve tapering still several months (at the earliest) away and 10-year Treasury yields down more than 7% in the past three months, another interest rate spike akin to what was seen in the second quarter probably is not at the front of every investor’s mind.
Still, investigating exchange traded funds that prove sturdy when rates rise is a good idea and one such fund could be seen as a rising rates surprise: The high-flying PowerShares DWA SmallCap Momentum Portfolio (NYSEArca: DWAS).
U.S. small-caps have surged this year, but 2013 has been a particularly strong year for DWAS. The ETF, which debuted in July 2012, has jumped 36% this year while hauling in $477.6 million in new assets. That ranks DWAS fifth among all PowerShares ETFs in terms of 2013 inflows. [10 ETFs That Have More Than Doubled in Size]
As for the advantages of owning DWAS in a rising rates environment, the proof is in the pudding.
“Between the weeks ending July 27, 2012 and Oct. 25, 2013, DWAS rose nearly 51.0% while the Russell 2000 Index appreciated 40.5% and the 10-year Treasury yield increased 62%,” said PowerShares.
Part of the reason for the rising rates excellence displayed by DWAS is its focus on momentum factors such as relative strength. The 200 stocks held by DWAS are selected specifically because of their robust relative strength traits, which has sparked significant out-performance of broader small-cap indices. [Enhanced ETFs Beating Their Benchmarks]
“Momentum, small cap, and value factors all have tended to outperform the market when interest rates are rising, but value has posted the smallest median return since 1962. It appears that rising interest rates tend to coincide with stronger economic conditions and corporate pricing power which benefits companies that are leveraged to earnings growth and less reliant on dividends to generate their return streams,” said PowerShares.
DWAS also allocates a combined 44.4% of its weight to consumer discretionary, technology and industrial names, three of the better-performing sectors when rates rise.
DWAS Rises With 10-Year Yields
Chart Courtesy: PowerShares