Aligning with the latest trend of fund launches that that focuses on smaller issuers, Invesco PowerShares joined the wave by launching the DWA Small Cap Technical Leaders Portfolio (DWAS) last week. The latest offering from the ETF powerhouse comes after a brief hiatus of five months but helps the company expand into more niche segments.
DWAS follows the Dorsey Wright Small Cap Technical Leaders Index (the underlying index) that tracks small companies with powerful relative strength characteristics. The securities for the Index are shortlisted based a proprietary selection methodology that identifies companies demonstrating relative strength characteristics.
Relative strength characteristics are determined by the Index Provider based on the firm’s market performance compared to other companies. Research has shown relative strength can be a powerful indicator of future performance and the previous relative strength funds from PowerShares have all outperformed markets.
The Underlying Index contains approximately 200 companies from a small-cap universe of approximately 2,000 of the smallest US companies that are chosen from a broader set of 3,000 companies. The index is rebalanced and reconstructed on quarterly basis.
The DWAS portfolio is well diversified with 200 individual holdings and is relatively balanced with the top 10 holdings aggregating just 15 percent of total assets under management.
The fund seeks to invest at least 90 percent of assets in small-cap equities, strictly in accordance with the guidelines specified by the index provider. However, DWAS may invest more than 25 percent of net assets in one single firm or groups of companies only to the extent that the underlying index reflects, thus increasing concentration risk.
The fund’s largest holding Jazz Pharmaceuticals (JAZZ) have surged more than 26 percent over the past year while other top holdings like Pier 1 Imports (PIR) and Clean Harbors Inc (CLH) have added 37 percent and 5 percent, respectively.
Since DWAS is a passively managed fund, it poses index risk, meaning a security won’t be bought or sold from the portfolio, unless it’s added or removed from the underlying index, even if the issuer has been generally under performing. The fund charges 60 basis points in annual fees.
Please note that small cap equities tend to be less liquid and more volatile relative to larger and more established companies. They are also more sensitive to business cycles since the sectors they operate in are often still evolving, hence more sensitive to economic conditions. This is why these types of ETFs are better suited for use at the beginning of a Buy cycle and not late in the game where I believe we are now.
Much more prices history is needed before I can make comparisons to comparable ETFs and view momentum numbers, which means this contender won’t be added to my ETF Master list for a while.
Disclosure: No holdings