Invesco PowerShares launches low vol global equity momentum ETF

Jul 27th, 2016 | By | Category: Equities

Invesco PowerShares has launched the PowerShares DWA Momentum & Low Volatility Rotation Portfolio (Nasdaq: DWLV), which invests in up to eight PowerShares exchange-traded funds, each offering a targeted exposure to a single asset class.

Invesco PowerShares launch low volatility global equity momentum ETF

Tom Dorsey, Founder of Dorsey, Wright & Associates.

The smart beta portfolio works by switching its exposure between different segments of US equities, international equities, or cash depending on momentum signals in the market, while also offering exposure to the low volatility factor.

Dan Draper, head of Invesco PowerShares, commented: “As one of the earliest pioneers of low volatility ETFs, we have seen the power of factor-based strategies in full force this year for investors around the world. In this new product, we’re combining low volatility and momentum in a blended strategy that further demonstrates our belief that the future of portfolio construction will be driven by factor strategies.”

The underlying index is the Dorsey Wright Multi-Factor Global Equity Index, owned and developed by Dorsey, Wright & Associates (DWA), an investment advisory firm whose innovative solutions draw upon the firm’s expertise in relative strength analysis. Relative strength is a momentum technique that relies on unbiased, unemotional, objective data, rather than biased forecasting and subjective research.

The initial steps in the index’s methodology involve analysing the price momentum of each of six major asset classes (US equities, international equities, fixed income, currencies, commodities, and cash) relative to its peers and ranking the asset classes from strongest positive relative momentum to weakest.

If cash ranks above US equities or international equities, the index will own the Nasdaq US T-Bill Part 2 Index at a 30% allocation with the remaining allocation attributable to the higher ranking asset class. In the event that cash ranks above both US equities and international equities, the index will own the Nasdaq US T-Bill Part 2 Index at a 100% allocation.

In instances where cash is ranked below both equities asset classes, the index will assign 70% and 30% weightings to ETFs representing the higher ranked and lower ranked asset classes respectively. Each asset class contains two ETFs targeting the momentum factor and two ETFs targeting the low volatility factor. These are as follows:

PowerShares DWA Momentum Portfolio (PDP)
PowerShares DWA SmallCap Momentum Portfolio (DWAS)
PowerShares S&P Low Volatility Portfolio (SPLV)
PowerShares S&P SmallCap Low Volatility Portfolio (XSLV)
PowerShares DWA Developed Markets Momentum Portfolio (PIZ)
PowerShares DWA Emerging Markets Momentum Portfolio (PIE)
PowerShares S&P Developed Markets Low Volatility Portfolio (IDLV)
PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV)

If either the US equities or international equities asset classes are ranked 1st or 2nd out of six in the relative strength tally, the fund will overweight the momentum ETFs relative to the low volatility ETFs by 70% to 30%. If either the US equities or international equities asset classes are ranked 3rd, 4th, or 5th out of six in the relative strength tally, the fund will overweight the low volatility ETFs relative to the momentum ETFs by 70% to 30%.

Momentum based strategies rely on investors continuing to support stocks which are increasing in value. Investors are indeed trend chasers regarding stock movements, continuing to buy as the stock price increases and sell as it decreases. Some investor traits that have been identified through the study of behavioural finance may provide an explanation.

Investors tend to anchor themselves to perceptions of stock value, responding slowly to new information contradicting their valuations. Also, investors wish to avoid the regret of mistiming the market. In this case they may hold the stock longer than is prudent, not wishing to sell early and miss out on potential returns.

As of 26 July 2016 the fund was invested in US equities while favouring low volatility ETFs. There was also an allocation to cash instruments.

The total expense ratio is 0.52%.

There are several ETFs currently available that harness DWA’s unique momentum methodology across a range of asset classes and categories. These include the PowerShares DWA Tactical Multi-Asset Income Portfolio (Nasdaq: DWIN), the PowerShares DWA Tactical Sector Rotation Portfolio (Nasdaq: DWTR), the First Trust Dorsey Wright Focus 5 ETF (Nasdaq: FV), the First Trust Dorsey Wright Dynamic Focus 5 ETF (Nasdaq: FVC), and the SPDR Dorsey Wright Fixed Income Allocation ETF (Nasdaq: DWFI).

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