As many exchange traded funds do, the Powershares DWA Momentum Portfolio (NYSEArca: PDP) rebalances on a quarterly basis. ETF rebalancing usually is not big news, but with PDP being a momentum fund based on a methodology driven by relative strength, tracking changes in the $1.2 billion ETF is not only interesting , but important for owners of the fund.
“Based on the addition and deletion of stocks throughout the year, from quarter-to-quarter, sector leadership trends often emerge. Consumer Cyclicals maintain the largest sector weighting in the PDP at 32.88%, compared to only 12.24% in the S&P 500,” according to Dorsey Wright and Associates, the company behind PDP’s underlying index.
Although momentum stocks and ETFs struggled in the latter part of the first quarter, 82% of the stocks held by PDP in the first three months of the year remain in the ETF, meaning the fund had first-quarter turnover of 18%. [Momentum ETFs Take a Beating]
In PDP, “industrials have the second largest weighting at 19.88%, followed by Basic Materials at 10.57%, an increase in 3.9%. When compared to the S&P 500. PDP also maintains a larger weighting towards Healthcare, while underweighting the other six groups relative to” the S&P 500, said Dorsey Wright.
None of PDP’s 100 holdings account for more than 2.92% of the ETF’s weight. Apple (NasdaqGS: AAPL) gets that 2.92% allocation followed closely by Jazz Pharmaceuticals (NasdaqGS: JAZZ) at 2.9%.
Although PDP is off 1.1% year-to-date, investors should not ignore the fund, particularly if Treasury yields spike again. The momentum factor has a legacy of out-performance during rise rate environments. Looking at PDP’s secotr lineup, it is easy to see why the ETF could be an ideal rising rates play. [Right Time for This Momentum ETF]
Consumer cyclical and industrial names are two of the best-performing sectors in rising rate environments and those groups combine for over 52% of PDP’s weight. That is not to say PDP does not work when rates fall.
Since the ETF debuted on March 1, 2007, it has slightly outpaced the S&P 500 while only modestly more volatile. The five-year Sharpe Ratio on the Dorsey Wright Technical Leaders Index is also higher than that of the S&P 500, according to PowerShares data.
PDP Q2 Sector Weights
