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 .

Performance Check

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.

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