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Small-Cap ETF Smokes the Russell 2000 in Its First Year


PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS), an index-based ETF that incorporates elements of active management, recently celebrated its first birthday with performance that trounced the Russell 2000.

DWAS has posted a total return of 45.7% for the year ended July 23, while the iShares Russell 2000 (IWM) gained 37.2%, according to Morningstar performance data. DWAS listed on July 19, 2012.

Invesco PowerShares manages a suite of DWA Technical Leaders funds that investors can use to “efficiently tap the alpha-seeking potential of momentum factor-based ETFs globally,” said Andrew Schlossberg, head of global ETFs at the company. “As the leading provider in smart beta ETFs, we see a lot of potential for focused factor-based strategies to help investors achieve their goals, whether it’s seeking to enhance returns, reduce risk, or both.”

Earlier this month, PowerShares said its family of fundamental ETFs passed $5 billion in assets. [PowerShares Fundamental ETFs Hit $5 Billion]

DWAS tracks an index maintained by Dorsey, Wright & Associates designed to identify companies that demonstrate powerful relative strength characteristics. The benchmark is comprised of about 200 companies selected from a small-cap universe of approximately 2,000 of the smallest U.S. companies. [PowerShares Lists Small-Cap ETF Based on Relative Strength]

There are many ETFs tied to fundamentally weighted benchmarks that attempt to outperform traditional indices that weight individual stocks by market capitalization. These ETFs blur the line between active and passive management. The funds mimic strategies used by active fund managers, but in a rules-based index.

Invesco PowerShares also manages PowerShares DWA Developed Markets Technical Leaders Portfolio (PIZ), PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) and PowerShares DWA Technical Leaders Portfolio (PDP). [Some Enhanced ETFs Beating Their Benchmarks]

PDP, which invests in U.S. large and mid-cap stocks, tries to exploit the momentum effect, explains Morningstar analyst Alex Bryan.

“Momentum is based on the premise that securities that have recently outperformed will continue to do so in the short run, and those that have underperformed will continue to lag. Similar to value stocks, stocks with positive momentum have historically outperformed in nearly every market studied over long time horizons,” he wrote in a report on the ETF.

“Nearly all momentum strategies have high turnover, and this fund is no exception. This can result in high trading costs and poor tax efficiency. PDP has kept transaction costs low by rebalancing only once a quarter, which reduces noise trading,” Bryan said, adding that PDP has been remarkably tax-efficient for a strategy with high turnover.

BlackRock also sponsors a momentum-based ETF, iShares MSCI USA Momentum Factor ETF (MTUM). [iShares Launches ‘Quality Factor’ ETF]

The opinions and forecasts expressed herein are solely those of John Spence, 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.