DWAS: New Technical Small Cap ETF Follows Relative Strength

Seeking Alpha

By Ron Rowland:

PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS - News) opened its doors on July 19. This is the fourth PowerShares ETF to follow a Dorsey Wright quant-based index, and the first to focus on domestic small cap stocks (DWAS overview).

DWAS will follow the Dorsey Wright SmallCap Technical Leaders Index. The index is composed of approximately 200 securities selected from a universe of 2,000 domestic small-cap stocks. Dorsey Wright’s proprietary relative strength methodology attempts to identify stocks likely to outperform the category. The portfolio uses a modified equal-weighting process with re-balancing and reconstitution occurring quarterly. The initial expense ratio for DWAS is 0.60%.

According to the DWAS prospectus (pdf), the underlying index is “non-diversified” and could be subject to significant concentration in a single sector or industry. As of 7/27/2012, the top sectors in DWAS were Health Care 22.3%, Financials 18.5%, Technology 16.4%, and Consumer Discretionary 15.3%. Energy received the smallest sector weighting with only 1.6%.

At the individual security level, DWAS’s weighting methodology provides reasonable company diversification with the top ten holdings adding up to around 15% of assets. The top five were Jazz Pharmaceuticals (JAZZ - News) 1.7%, Clean Harbors (CLH - News) 1.7%, Pier 1 Imports (PIR - News) 1.6%, Banner Corp. (BANR - News) 1.5%, and Exact Sciences (EXAS - News) 1.5%.

Analysis/Opinion: Dorsey Wright made its name in technical analysis by popularizing the “point and figure” method. Its money management arm uses other techniques to build portfolios of high relative-strength stocks. Three older PowerShares ETFs follow Dorsey Wright indexes. They are PowerShares DWA Technical Leaders (PDP - News), PowerShares DWA Developed Markets Technical Leaders (PIZ - News), and PowerShares DWA Emerging Markets Technical Leaders (PIE - News).

The preceding three PowerShares/DWA funds have performed well and attracted enough assets to avoid ETF Deathwatch membership. We expect DWAS will do the same.

Disclosure: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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