PowerShares partners with DWA on momentum-based multi-asset income ETF

Mar 15th, 2016 | By | Category: Alternatives / Multi-Asset

Invesco PowerShares, a leading global provider of exchange-traded funds, has launched the PowerShares DWA Tactical Multi-Asset Income Portfolio (Nasdaq: DWIN). The Nasdaq-listed ETF harnesses proprietary methodology from Dorsey, Wright & Associates (DWA), a Virginia-based investment advisory firm, which uses technical analysis to facilitate exposure to the strongest price-performers amongst a range of equity, bond and alternative income-producing strategies.

PowerShares Launch Multi-Asset Income ETF based on Dorsey Wright momentum methodology

Tom Dorsey, Founder of Dorsey, Wright & Associates.

According to DWA, the technical analysis approach is advantageous due to its use of unbiased, unemotional and objective data from which it draws its conclusions, as well as its focus on price movements, the ultimate determinant of supply and demand in a marketplace.

The ETF adopts a “fund of funds” (or rather “ETF of ETFs”) structure, meaning that it invests its assets in other ETFs rather than in individual securities.

The fund’s index, the Dorsey Wright Multi-Asset Income Index, selects ETFs based on a combination of relative strength indicators and current yield. The methodology is applied to a starting universe of ETFs (the eligible universe consists mostly of PowerShares ETFs that employ income-oriented strategies), each targeting a different asset segment designed to provide a high level of current income. These include government and corporate bonds, preferred stock, dividend-paying equities, REITs and MLPs. Relative strength testing is conducted between these ETFs to identify market trends which can ultimately be used to capitalize on performance differences between income segments.

In the context of the Dorsey Wright strategy, ‘relative strength’ compares the price performance, or momentum, between each income strategy (i.e. ETF). According to the firm, the absolute momentum of the individual strategy is not as important as the relative momentum between the strategies. The model determines whether a strategy’s momentum is increasing relative to another strategy and assigns a buy signal if it is. The strategies are then ranked in descending order according to their cumulative number of ‘buy’ signals. The bottom half of the ranked strategies are subsequently eliminated.

The remaining ETFs are ranked according to their current yield with the top five being selected and equally weighted in the final index composition. Index rebalancing and fund reconstitution is undertaken on a monthly basis.

Dan Draper, Head of Invesco PowerShares, commented: “Despite increased volatility in financial markets, we recognize that investors still expect better than average returns, which has become increasingly difficult for income investors looking for yield. This new multi-asset income solution helps investors navigate volatility using a sub-sector ETF rotation strategy covering a universe of seven income producing segments including treasuries.”

Momentum-based strategies rely on investors continuing to support securities or sectors which are increasing in value. Investors are indeed trend chasers regarding price movements, continuing to buy as prices increase and sell as they decrease. 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 security 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 asset longer than is prudent, not wishing to sell early and miss out on potential returns. Due to these factors, these strategies have historically provided superior returns when compared to broad market cap-weighted equity indices.

Another potential benefit of the ETF is its potential to provide a degree of downside protection during bear markets. Given that the eligible categories for investment include government bonds and high-quality corporate debt, the strategy should shift some assets into these less-risky asset categories when equity markets are experiencing strong negative momentum.

“Dorsey Wright is excited to continue its long-standing and valued relationship with Invesco PowerShares with the launch of Dorsey Wright’s first income-focused portfolio, the PowerShares DWA Tactical Multi-Asset Income Portfolio,” added Tammy DeRosier, President of Dorsey, Wright & Associates. “This strategy is unique in its ability to pivot within a broad array of income funds toward areas that exhibit strong relative strength with an emphasis on income generation.”

As of 11 March 2016, the fund is invested in the following ETFs: PowerShares Preferred Portfolio (21.0%), PowerShares High Yield Equity Dividend Achievers Portfolio (20.7%), PowerShares Build America Bond Portfolio (20.4%), PowerShares Global Short Term High Yield Bond Portfolio (19.0%) and PowerShares Emerging Markets Sovereign Debt Portfolio (18.9%).

Investors should take heed that the strategy’s focus on technical factors may lead to fund positions which exhibit higher levels of concentration in individual sectors, industries or securities than the investor may deem prudent. As such the fund may experience higher levels of volatility than other more diversified funds.

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