This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Under the Microscope: Technical Analysis ETF

By Eric Dutram of ETF Database

Although the ETF world started by focusing on tracking well known indices such as the S&P 500, it has significantly branched out in recent years, offering funds that track everything from commodity indices to quantitative methodologies that attempt to deliver excess returns.

These quant ETFs haven't really hit it big yet, but they have certainly attracted a fair amount of assets from investors who believe in the benefits of stock analysis but are eager to reap the benefits of the ETF structure.

One interesting marriage is found in the PowerShares DWA Technical Leaders Portfolio (PDP), a fund that offers access to a strategy of buying and selling securities based on chart patterns and other technical indicators such as relative strength levels.

Investors who emphasize relative strength believe that stocks that show high relative strength compared with broader indexes are likely to continue increasing in price, and that it is better to buy those stocks than to buy stocks with falling prices. In other words, "[Prices] are never too high to begin buying or too low to begin selling," , according to Jessie Livermore.

Relative strength investing is a relatively simple strategy, but there is ongoing debate about how the strength should be calculated and the effectiveness of such a strategy in an era when markets are more efficient than ever.

PDP tracks the Dorsey Wright Technical Leaders Index, which includes approximately 100 U.S.-listed companies that demonstrate powerful relative strength characteristics. The index is constructed pursuant to Dorsey Wright's proprietary methodology, which takes into account the performance of each of the 3,000 largest U.S.-listed companies as compared to a benchmark index, and the relative performance of industry sectors and subsectors.

Dorsey Wright believes that relative strength is a "very robust and adaptable stock selection method." Furthermore, the firm states that its process for selecting stocks in the portfolio is "systematic" and not influenced by what the firm thinks should be included in or excluded from the portfolio.

PDP's portfolio uses a modified equal weighting methodology that assigns more weight to securities with better relative strength characteristics. The fund rebalances quarterly and produces a relatively high level of turnover; currently it stands at 87%.

Due to this high level of turnover, the holdings could vary significantly from one period to the next; one quarter's leaders could be the next quarter's laggards, which could lead to the securities' exclusion from the fund.

Currently, the fund is heavy in consumer discretionary firms (which make up 20% of the total assets). Another 20% goes to industrial firms, while information technology firms constitute 18%. Some of the top holdings include Apple (AAPL) (3.5%), American Tower (AMT) (3.45%) and Ventas (VTR) (3.4%).

PDP is largely slanted towards mid-cap firms, which constitute close to 70% of the fund's total assets. PDP has done very well in 2010, posting a gain of 10% (by comparison, SPDR S&P Mid-Cap 400 (MDY) is up about 9%). The fund is also up close to 60% over the past year, and charges an expense ratio of 0.60%.

For a more detailed discussion of relative strength, see this article.

For more ETF news, make sure to sign up for our free ETF newsletter.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
PDP $40.48 -0.27%
AAPL $94.19 -1.04%
FB $118.06 0.54%
GOOG $695.70 0.48%
TSLA $222.56 -4.20%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs