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This ETF Might Benefit From Active Management

If you follow the ETF industry you know that actively managed ETFs are much closer to reality than they were in the past. PowerShares has recently launched an emerging market product with a strategy that, while compelling, might be better suited if the manager had the freedom to reshuffle the holdings more frequently.

The PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) screens potential constituents (stocks from just about every emerging market) for relative strength, as index provider Dorsey Wright and Associates sees it, and builds a portfolio of 100 stocks that will hopefully outperform the iShares MSCI Emerging Markets Index Fund (EEM).

PIE has an expense ratio of 0.90% and rebalances its holdings quarterly. As I see it, there are two risks to owning this fund; one is that the relative strength methodology fails to outperform, and the second is its performance may suffer from not being able to rebalance more often in such a volatile market.

PowerShares has a similar fund that owns domestic stocks, the PowerShares Dorsey Wright Technical Leaders Portfolio (PDP). It has been trading since March.



A Strong Lineage
The PowerShares Dorsey Wright Technical Leaders Portfolio has outperformed the S&P since inception.
Click here for larger image.
Source: bigcharts.com

As you can see from the above chart, PDP has meaningfully outperformed the S&P since inception. So it's reasonable that PowerShares is going back to the well to expand the product line.

The back test for PIE shows that the Dorsey Wright method for isolating relative strength has added value vs. just owning EEM. But of course if the back test were lousy there would be no fund.



Backtest of PIE
Dorsey Wright's methodology appears to add value in emerging markets, too.
Source: Powershares.com

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