Stock-Picking Dorsey ETF 'PDP' Gathers Steam

Paul Britt
January 16, 2013

 

The PowerShares DWA Technical Leaders ETF (PDP) hit an asset milestone recently when it and three sister funds together reached $1 billion in assets, as noted by my colleague Olly Ludwig.

PDP is the largest of the four DWA Technical Leader ETFs, covering U.S. equities and boasting $771 million in assets. Its assets under management benefited from strong returns in 2012 and, even more so, from net inflows of $200 million in 2012.

I’ll dive into the returns in a moment, but the inflows story definitely caught my eye too.

One of 2012’s themes was net investor money flowing from mutual funds and into ETFs , the implication being a trend away from actively managed stock selection—i.e., mutual funds—and into staid, passive index investing in the form of ETFs.

However, ETFs like PDP aren’t staid or passive. Sure, PDP follows an index. But its underlying index bears little resemblance to a purely passive take on the equity market.

PDP functions more like a “quasi-active” fund, with high portfolio turnover of 96 percent over the last fiscal year, according to the prospectus.

With $200 million in new money into this fund, investors are signaling they’re quite comfortable with stock-picking. It’s just the high fees and loads that come with some stock-picking mutual funds that they’re not so fond of anymore.

PDP charges 67 basis points annually—$67 for every $10,000 invested—which is not cheap compared with some truly passive U.S. equity ETFs, but still less than the all-in costs of many active or quasi-active mutual funds, especially those with loads.

PDP trades and tracks well too, so all-in costs should be very close to its headline fee.

Performance

PDP launched in March 2007, so it has a nice long record to evaluate.

I’ll use a plain-vanilla, market-cap-weighted fund for comparison; namely, the Vanguard Total Stock Market ETF (VTI). VTI makes a good strong benchmark in that it represents the passive market very well, and its all-in cost is dirt cheap.

So how does PDP stack up?

I looked at one-, three- and five-year periods broken neatly by calendar year—just 2012; 2010 through 2012; and 2008 through 2012, respectively.

 

 

PDP vs. VTI
PDP vs. VTI

 

 

 

 

Compared with VTI in 2012, the fund had higher returns, a bit more volatility and lower market risk. One interpretation is that PDP took more firm-specific risk—consistent with picking a relative small handful of stocks—and that these picks paid off.

Over three years—2010 through 2012—the fund took more risk in general than VTI but, again, its bets paid off. In other words, it had higher returns, higher volatility and higher market risk.

The five-year period, 2008 through 2012, includes the fall 2008 downdraft, which hit PDP a lot harder than VTI and led to lower returns with more volatility.

I found no alpha, a statistically significant risk-adjusted outperformance, in any of the three periods, but that’s no surprise in the highly efficient U.S. equity market.

In the end, PDP’s performance over more recent periods should bolster its appeal to those willing to take a bit more risk in search of more return.

This makes it a viable middle-ground alternative between purely passive super-low-cost ETFs like VTI and traditional actively managed mutual funds, which often come with higher costs.

Without a doubt, PDP is just one of many ETFs that offer an alternative to pure-vanilla U.S equity exposure.

But importantly, PDP stands out from many in this crowd, as its strong liquidity, hefty asset base and history of avoiding radical risk clearly suggest.

 

 

At the time of this writing, the author held no positions in the securities mentioned. Contact Paul Britt at pbritt@indexuniverse.com .


 

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