Despite some rough patches for momentum stocks in 2014, the Powershares DWA Momentum Portfolio (NYSEArca: PDP) was able to slightly outpace the S&P 500, marking the seventh time in the past eight years the well-known strategic beta ETF has topped the benchmark U.S. index.
PDP, which debuted in March 2007, tracks the Dorsey Wright Technical Leaders Index, “which takes into account, among other factors, the performance of each of the approximately 1,000 largest companies in the eligible universe as compared to a benchmark index, and the relative performance of industry sectors and sub-sectors,” according to PowerShares.
Although it is not a true actively managed ETF, PDP’s flexible indexing methodology makes Dorsey Wright’s sector shifts notable actions. [Comeback for a Momentum ETF]
With the energy sector being the S&P 500’s worst performer in 2014 and displaying little momentum in the fourth quarter, the sector is not currently represented in PDP. Despite the compelling valuations offered by telecom stocks and utilities’ status as the top performing sector last year, those groups combine for less than 3% of PDP’s weight.
“A key reason that many advisors employ relative strength strategies is to have a logical way to adapt to market leadership. Often times, achieving flexibility in the market involves buying and selling securities. However, sometimes flexibility can be achieved by simply using an adaptive strategy,” according to Dorsey Wright.
PDP also reduced its materials exposure to 8.4% from nearly 12% in the third quarter of 2013 while the ETF’s industrial sector has seen only modest changes in the area of 17% to 20% over the past year.
Advisors and investors have embraced PDP’s flexibility and momentum attributes. Over the past year, the ETF hauled in almost $272 million in assets, a total surpassed by just seven other PowerShares ETFs. Now home to over $1.6 billion in assets, PDP has grown by 60% since October 2013. [Another Momentum ETF Tops $1B in AUM]
Speaking of momentum, PDP’s weight to health care stocks has climbed to 19.4%, more than quadruple the ETF’s weight to that sector at the start of the third quarter of 2014. Half of PDP’s top 10 holdings are health care stocks and of the ETF’s 16 health care holdings, roughly a third are biotechnology names.
Consumer discretionary, one of the sectors trading at the largest valuation premium to the S&P 500, is now PDP’s largest sector weight at 28.5%, up from about 20% at the start of last year.
Historical data indicate the time is right to consider PDP in concert with the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV).
Dorsey Wright & Associates back-tested the S&P 500 Low Volatility Index, SPLV’s index, for the 1997 through 2011 time frame, noting that it returned almost 87% in the November 1-April 30 period, also known as the best six months for stocks.
On the other hand, PDP’s underlying index, the Dorsey Wright Technical Leaders Index jumped a staggering 465.5% in the best six-period from 1997 through 2011, according to Dorsey Wright data.
A portfolio of 70% to PDP and 30% to SPLV over that period more than quadrupled in the November through April time frame of those years. [A Compelling Two-ETF Strategy]
PDP Consumer Discretionary Weight
Chart Courtesy: Dorsey Wright, Seeking Alpha