PowerShares DWA Momentum Portfolio (PDP):
The main goal of the quarterly rebalancing process is to allow the index to weed out those stocks that are not performing, and replace them with stocks that are exhibiting superior relative strength characteristics. During the most recent quarterly rebalance, there were 18 stocks removed from the DWA Technical Leaders Index and 18 new stocks were added to the index. So, while 18% of the PDP holdings have turned over from quarter-to-quarter, 82% of the stocks that were in the index during Q1, have maintained their positive relative strength characteristics and thus remain in the index heading into the second quarter of 2014.
Based on the addition and deletion of stocks throughout the year, from quarter-to-quarter, sector leadership trends often emerge. Consumer Cyclicals maintain the largest sector weighting in the PDP at 32.88%, compared to only 12.24% in the S&P 500 [SPX]. Industrials have the second largest weighting at 19.88%, followed by Basic Materials at 10.57%, an increase in 3.9%. When compared to the S&P 500 [SPX], PDP also maintains a larger weighting towards Healthcare, while underweighting the other six groups relative to SPX.
The image below illustrates the quarterly excess returns of the PDP versus the S&P 500 Index [SPX] since 2003, during which it has outperformed more quarters than it has lagged. While no relative strength portfolio will be “right” 100% of the time (as leadership changes often result in periods of underperformance), the ETF has produced outperformance this past quarter after a quarter of underperformance.
