Countless investors have embraced ETFs in their portfolios thanks to the cost-efficient and easy-to-use nature of these financial instruments. Aside from serving as excellent core building blocks in long-term and retirement-themed portfolios, ETFs have also gained popularity among investors seeking out tactical exposure. One particular breed of products from industry veteran PowerShares has continued to slip under the radar for many, although a closer look under the hood reveals some attractive opportunities. Invesco PowerSharesoffers a suite of Technical Leaders ETFs which target a number of popular asset classes with a twist; these products employ a proprietarymethodologythat allows them to sort through thousands of securities and narrow down their basket of holdings to only the ones which satisfy certain criteria. The result is a shallower portfolio that is deemed to hold only the strongest components from each respective universe based on relative performance measures .
Relative Strength 101
So what's behind the Technical Leadersmethodology? Relativestrength. Each of the PowerShares offerings uses relative strength measures as the primary metric to consider securities for inclusion in each underlying portfolio. So what exactly is relative strength?
Simply put, relative strength measures the stocks's individual performance in relation to its peers. The index provider behind this lineup of ETFs, Dorsey Wright, states that relative strength improves upon the technical foundation of a basic trend following strategy; this is accomplished by relying on unbiased, unemotional, and objective data rather than biased forecasting and subjective research which isoftentimes at the discretion of the individual portfolio manager .
The indexes underlying the Technical Leaders ETFs select the securities from each respective universe that possess the most powerful relative strength characteristics in relation to the performance of the industry and sub-sectors; essentially, these portfolios are quantitatively-enhanced benchmarks. This sort of strategy may appeal to anyone who believes that rules-based technical analysis can serve to enhance bottom line returns over the long-haul .
The relative strength-focused lineup of PowerShares offerings has turned in impressive performance results, managing to outperform broad-based ETFs covering similar asset classes (returns as of 9/13/2012):
PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS): This ETF includes about 200 companies companies that demonstrate relative strength in the U.S. small cap universe. Performance data is limited due to this ETF launching in July of this year.
|Index||1 Month Return|
|DWA SmallCap Technical Leaders Portfolio||6.31%|
|iShares Russell 2000 Index Fund (IWM)||5.72%|
PowerShares DWA Emerging Market Technical Leaders Portfolio (PIE): This ETF follows about 100 companies based in emerging markets, with a heavy interest in Asia and Latin America.
|Index||3 Yr Return|
|DWA Emerging Market Technical Leaders Portfolio||9.21%|
|iShares MSCI Emerging Markets Index Fund (EEM)||4.39%|
PowerShares DWA Technical Leaders Portfolio (PDP): This ETF only invests in the 100 US listed countries that have the strongest performance in their ownsub sectors.
|Index||3 Yr Return|
|DWQ Technical Leaders Portfolio||17.23%|
|State Street SPDR S&P 500 (SPY)||13.52%|
PowerShares DWA Developed Market Technical Leaders Portfolio (PIZ):This ETF follows about 100 companies based in developed markets outside of the US, with a tilt towards Europe, Australia, and Canada.
|Index||3 Yr Return|
|DWA Developed Market Technical Leaders Portfolio||4.85%|
|iShares MSCI EAFE Index Fund (EFA)||2.53%|
Follow me on Twitter@SBojinov
Disclosure: No positions at time of writing.
Stock AnalysisLearn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
Mutual Funds & ETFsLearn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
Stock AnalysisDiscover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
SavingsIf you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
Investing BasicsUnderstand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
Mutual Funds & ETFsThese three transportation funds attract the majority of sector volume.
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
Investing BasicsA look at two different trading strategies for ETFs - one for investors and the other for active traders.
Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>