Since the smart-beta methodology is all automated through an index, Tom Dorsey of Dorsey, Wright & Associaites argues that he acts more like a robot designer. If his team were to suddenly disappear, the algorithms that direct DWA index-based, smart-beta ETFs would keep on running. [Nasdaq Boosts Index Business With Dorsey Wright Acquisition]
“Once a quarter, we press a button,’’ Dorsey said in the article, pointing out that the algorithms generate a list of investments for something like the First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV). “We just need someone to press the button.’’
Dorsey, Wright & Associates has also been long-time partner with the PowerShares suite of momentum ETFs. For example, the Powershares DWA Momentum Portfolio (NYSEArca: PDP) picks out stocks based on relative strength.
“Relative strength improves upon the technical foundation of basic trend following because it relies on unbiased, unemotional and objective data, rather than biased forecasting or subjective research,” according to PowerShares.
So far, some of these alternative index-based strategies have helped generate greater performance. For instance, PRF has outpaced the S&P 500 index since it started on Dec. 19, 2005, returning 120% compared to the 103% from the S&P 500. Since it began trading in March 2007, PDP has returned 82%, whereas the S&P 500 gained 78%.
For more information on alternative index funds, visit our smart beta category.
Max Chen contributed to this article.