Momentum ETF Changes for Q2

As many exchange traded funds do, the Powershares DWA Momentum Portfolio (PDP) rebalances on a quarterly basis. ETF rebalancing usually is not big news, but with PDP being a momentum fund based on a methodology driven by relative strength, tracking changes in the $1.2 billion ETF is not only interesting , but important for owners of the fund.

“Based on the addition and deletion of stocks throughout the year, from quarter-to-quarter, sector leadership trends often emerge. Consumer Cyclicals maintain the largest sector weighting in the PDP at 32.88%, compared to only 12.24% in the S&P 500,” according to Dorsey Wright and Associates, the company behind PDP’s underlying index.

Although momentum stocks and ETFs struggled in the latter part of the first quarter, 82% of the stocks held by PDP in the first three months of the year remain in the ETF, meaning the fund had first-quarter turnover of 18%. [Momentum ETFs Take a Beating]

In PDP, “industrials have the second largest weighting at 19.88%, followed by Basic Materials at 10.57%, an increase in 3.9%. When compared to the S&P 500. PDP also maintains a larger weighting towards Healthcare, while underweighting the other six groups relative to” the S&P 500, said Dorsey Wright.

None of PDP’s 100 holdings account for more than 2.92% of the ETF’s weight. Apple (AAPL) gets that 2.92% allocation followed closely by Jazz Pharmaceuticals (JAZZ) at 2.9%.

Although PDP is off 1.1% year-to-date, investors should not ignore the fund, particularly if Treasury yields spike again. The momentum factor has a legacy of out-performance during rise rate environments. Looking at PDP’s secotr lineup, it is easy to see why the ETF could be an ideal rising rates play. [Right Time for This Momentum ETF]

Consumer cyclical and industrial names are two of the best-performing sectors in rising rate environments and those groups combine for over 52% of PDP’s weight. That is not to say PDP does not work when rates fall.

Since the ETF debuted on March 1, 2007, it has slightly outpaced the S&P 500 while only modestly more volatile. The five-year Sharpe Ratio on the Dorsey Wright Technical Leaders Index is also higher than that of the S&P 500, according to PowerShares data.

PDP Q2 Sector Weights

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.