The fund-of-funds investment strategy has become quite popular among investors and exchange traded fund managers have been quick to get off the block in order to capitalize on the growing trend.
Invesco PowerShares, a leading global provider of ETFs, recently launched the PowerShares DWA Tactical Multi-Asset Income Portfolio (DWIN) that takes the F-o-F (or rather the ETF of ETFs) investment approach, and invests in other ETFs rather than in individual securities.
DWIN expands the firm’s relationship with Dorsey, Wright & Associates (DWA), a Virginia-based investment advisory firm that are pioneers in technical, momentum and relative strength investing strategies. While PowerShares already has a long lineup of products with the firm, the First Trust Dorsey Wright Focus 5 ETF with $4.2 billion in assets have been DWA’s most successful product with any fund manager yet.
DWIN follows a similar technical/momentum methodology as all DWL products, but this time targets the income generators. According to DWA, the technical analysis approach for targeting the strongest price-performers is advantageous as the conclusions are drawn from unbiased, unemotional and objective data sets.
DWIN tries to reflect the performance of the Dorsey Wright Multi-Asset income Index and selects ETFs based on a combination of relative strengths that includes a momentum indicator and current yield. The methodology is applied to the eligible universe of ETFs – consisting mostly of PowerShares ETFs that employ income oriented strategies, to screen a different segment that provides higher-levels of current income.
These include REITs, MLPs, preferred stocks, government and corporate bonds, and dividend paying equities.
According to Dorsey Wright, relative price performance, or momentum, between income strategies is more important than absolute momentum of individual strategies. The DWA model assigns a ‘buy’ signal if a strategy’s momentum is increasing relative to another strategy. The strategies are then ranked in a descending order based on total number of ‘buy’ signals; subsequently bottom half of the rankings are eliminated.
The final index is constituted by ranking and equally weighting the top five remaining ETFs according to their current yields. The index is re-balanced and reconstituted on a monthly basis using a sector-rotation strategy from a universe of seven income producing sectors in order to help investors navigate volatility.
Study of behavioral finance shows investors tend to stick to their perceptions of a security value, and respond slowly to new information that contradict their valuations. They end up holding assets longer than prudent in the fear of missing out on potential returns, which explains the historical under-performance of broad market capitalization-weighted equity indices.
DWIN’s another potential benefit lies in its ability to provide downside protection during times of heightened volatility when markets are trending lower. Assets could be shifted to eligible less risky categories including government bonds and high-quality corporate debt when equity indices are showing strong negative momentum.
While predicting which income-generating asset class will lead for the year is not easy, research by PowerShares show MLPs and preferred shares have been annual leaders since 2007 on multiple occasions.
However, you should bear in mind the fund faces concentration risk in individual sectors or industries, and may exhibit higher volatility than other more diversified peers.
DWIN charges 0.69 percent annually.
Disclosure: No holdings