The momentum factor is seeing renewed strength this year and that is benefiting an array of exchange traded funds. The Powershares DWA Momentum Portfolio (NYSEArca: PDP), which utilizes technical analysis from Dorsey Wright and picks out stocks based on relative strength. PDP is up more than 9% year-to-date and hit an all-time on Wednesday.
The momentum strategy basically bets that hot movers will continue to rise, so investors would buy high and sell even higher. Investors who want to follow this momentum strategy will be betting on outperforming sectors flying even higher. PDP tracks the Dorsey Wright Technical Leaders Index, which usually includes 100 Nasdaq-listed companies.
“The Index is constructed pursuant to Dorsey, Wright & Associates, LLC’s proprietary methodology, 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.
While many momentum ETFs often feature technology or consumer discretionary as their top sector weights, PDP’s largest sector allocation is almost 25% to industrials. Technology and consumer discretionary follow at a combined 36.5%.
Supporting the ongoing growth in smart beta strategies, factors such as quality, momentum, value, size and minimum volatility have been drivers of returns across asset classes and helped shore up shortcomings of traditional market cap-weighted index funds.
Potential investors, though, should be aware that the momentum strategy typically works well under sustained market rallies and could breakdown during volatile conditions. Since defensive stocks typically do better during volatile conditions, the momentum strategy could load up on conservative picks and miss out on the initial recovery in riskier assets.
“Momentum was actually a really interesting case, because unlike value and low volatility, actually industry selection was pretty important to the success of the momentum factor. So, those results were quite interesting. The findings did depend, as you mentioned, on the factor that we looked at,” said Morningstar in a recent note.
Although it emphasizes momentum, PDP’s holdings are mostly large-cap names as highlighted by an average market value of $61.7 billion for the ETF’s holdings. PDP debuted just over 10 years ago and has $1.4 billion in assets under management.
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