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Riding The ETF Momentum Into 2016

ETF Professor

A phenomenon that has caught plenty of market observers by surprise this year is the outperformance of the momentum factor over its value counterpart. Momentum can take on multiple forms and it is not limited to glitzy biotechnology and Internet stocks.

However, it is some of those glitzy Internet stocks that have driven the impressive returns accrued by the consumer discretionary group, this year's top-performing S&P 500 sector.

Don't Be Surprised

"The strength of consumer discretionary stocks is not altogether surprising, given the strength of the labor market. Wage and salary growth is up 4.0% since last August, and consumers’ assessment of the job market is also favorable. According to The Conference Board, the spread between those stating that jobs are "plentiful" and those claiming that jobs are "hard to get" was 0.8 in September – the widest chasm in sentiment since the spring of 2008," said PowerShares, the fourth-largest U.S. ETF issuer, in a recent note.

The PowerShares DWA Consumer Cyclicals Momentum Portfolio (NYSE: PEZ) has returned 4.1 percent year-to-date. PEZ, which is home to 38 stocks and $211.4 million in assets under management, is not the traditional consumer discretionary ETF. The fund tracks a momentum-based index and, perhaps surprisingly, allocates a scant 4.5 percent of its weight to Internet stocks. Five other industry groups command larger weights in PEZ.

Due in large part to the energy sector's significant contraction, third-quarter S&P 500 earnings growth is expected to be mediocre. However, earnings growth is expected to be strong in 2016, led by the consumer discretionary and healthcare sectors.

"Looking ahead, analysts surveyed by Bloomberg as of Oct. 2, 2015 expect the strongest growth in 2016 to come from the consumer discretionary and health care sectors," notes PowerShares.

Newest Play

That could prove to be good news for the PowerShares DWA Tactical Sector Rotation Portfolio (NASDAQ: DWTR), which debuted last Friday. DWTR tracks the Dorsey Wright Sector 4 Index, which "is designed to gain exposure to the strongest relative strength sectors in the US through the universe of nine PowerShares DWA sector Momentum ETFs," according to PowerShares.

The new ETF holds four other PowerShares ETFs that track Dorsey Wright momentum indexes, including PEZ and the $225.4 million PowerShares DWA Healthcare Momentum Portfolio (NYSE: PTH). PTH is a pseudo biotech ETF as that industry accounts for almost 51.5 percent of the fund's weight.

PEZ and PTH combine for nearly 51 percent of DWTR's weight and do not forget DWTR's largest holding, the PowerShares DWA Consumer Staples Momentum Portfolio (NYSE: PSL). PSL is arguably the closest thing to "sexy" among consumer staples ETFs, but there is no arguing with its recent track record. PSL is this year's top-performing consumer staples ETF with a gain of over 10 percent.

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