Index Swap Already Lifting This ETF

ETF Trends

Occasionally, issuers of exchange traded funds swap indices. The news, with a few exceptions, is rarely earth-shattering.

News of an ETF changing its index may not always be front page news, but it is still important to investors. Index changes among sector ETFs highlight the importance of knowing what is under the hood. For example, not all ETFs that have “technology” in their names are heavy on Apple (AAPL), Google (GOOG) and Microsoft (MSFT). [Small Index Variations Matter]

The PowerShares DWA Healthcare Momentum Portfolio (PTH) is, in the short time since the change, proving to be a beneficiary of a recent index swap. Last week, 10 PowerShares ETFs transitioned to Dorsey Wright indices, which focus on identifying stocks with impressive relative strength. PTH was one of those ETFs. [PowerShares ETFs Changes Indices]

As a health care ETF, PTH did not need a lot of help. From the start of 2014 through Feb. 18, its last day with its old index, PTH gained 7.2%. [Health Care ETFs Leading the Way]

If biotechnology stocks keep behaving as they have been, investors in PTH will be glad PowerShares made the index swap. At the end of 2013, PTH had a biotech weight of 13.9%. Now that it tracks the DWA Healthcare Technical Leaders Index, the ETF’s biotech weight has nearly tripled to 39.9%.

The proof is in the pudding. It took PTH seven weeks to gain 7.2%, but just seven trading days since the index swap to gain 4.6%. The index change also means PTH now features six biotech stocks combining for over 24% of its weight in its top-10 holdings. At the end of 2013, PTH had just three biotech stocks in its top-10 lineup combining for less than 8% of the ETF’s weight,

Weighting an ETF by momentum or relative strength has its advantages and drawbacks. Both were on full display last year with two PowerShares ETFs. For example, the PowerShares DWA Emerging Markets Momentum Portfolio (PIE) was severely punished when developing economies were pressured by speculation of tapering by the Federal Reserve.

On the other hand, in what was a good year for U.S. small-caps, the PowerShares DWA SmallCap Momentum Portfolio (DWAS) crushed the Russell 2000 by over 1,100 basis points. [Momentum ETF Could Rally]

PowerShares DWA Healthcare Momentum Portfolio

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