An exchange traded fund’s relationship to its underlying index is one of the most important and well-documented elements of ETF investing.
From time to time, ETF providers swap indices on some of their funds. Sometimes, the changes are negligible. In other instances, such as the addition of a new country or subtraction of a company that stopped paying a dividend, the changes can be significant.
Invesco PowerShares, the fourth-largest U.S. ETF issuer, made significant changes to its lineup of sector ETFs in February when it transitioned nine sector funds along with the PowerShares DWA NASDAQ Momentum Portfolio (DWAQ) to Dorsey Wright indices based on momentum and relative strength strategies. [Index Changes for 10 PowerShares ETFs]
Prior to the conversion of those 10 funds to Dorsey Wright indices, Invesco PowerShares had a long-standing relationship with the index provider that includes successful ETFs such as the $1.26 billion PowerShares DWA Momentum Portfolio (PDP) and $465.3 million PowerShares DWA SmallCap Momentum Portfolio (DWAS) .
Since the index conversions, the nine PowerShares sector ETFs, a group that includes the PowerShares DWA Healthcare Momentum Portfolio (PTH) and the PowerShares DWA Industrials Momentum Portfolio (PRN) , have gained nearly $85 million in new assets, Invesco PowerShares said in an interview with ETF Trends.
Those robust inflows indicate advisors and investors were not shaken by the March/April sell-off in momentum stocks despite the fact that each of the nine PowerShares sector ETFs has “momentum” in their names.
In particular, PTH has rebounded quite well. After the index swap, the ETF saw its weight to biotech stocks nearly quadruple. Over the past two months, PTH has surged 11.3%. [Index Swap Already Helping This ETF]
PTH is just one example, but the fund underscores an important element of the Dorsey Wright methodology. That being the index provider’s ability to nimbly rotate out of a sector’s lagging industry groups and into the ones that are showing noticeable relative strength.
Consider this possibility with the PowerShares DWA Energy Momentum Portfolio (PXI) , which in reality has been one of the best non-leveraged energy sector ETFs this year. The $235.2 million ETF currently has low exposure to refiners and scant exposure to the Exxon Mobils (XOM) and Chevrons (CVX) of the world. However, if refiners or integrated oil names start leading the energy sector, PXI can rotate into those names without the constrictions of a traditional cap-weighted index ETF. [An Energy ETF With Momentum]
Invesco PowerShares said that PXI along with the PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ) and the PowerShares DWA Technology Momentum Portfolio (PTF) have been the top asset gathers since the conversion to the Dorsey Wright Indices.
Dorsey Wright also offers advisors a sector rotation strategy based on the PowerShares DWA Momentum Sector ETFs. Advisors are showing interest in the Dorsey Wright methodology’s application to the PowerShares sector funds in part because they know proper sector identification is their ticket to potentially outperform the broader market, according to Invesco PowerShares.