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

PIE is fairly concentrated with a 33% allocation to Indonesia, 19% to China, 12% to Malaysia and 12% to Brazil. There are also six more countries with much smaller weights. I don't think the fund takes on too much single-stock risk; the largest company, Timah, an Indonesian mining and engineering conglomerate, has a 5.8% weight.

One thing that stands out is that the P/E ratio of these holdings averages out to 18.84, which, although cheaper than EEM's average P/E of 21.58, is high by historical standards. It used to be that investors in emerging market stocks were compensated for the extra risk with P/E ratios that were generally lower than in U.S. stocks. The fact that this is no longer true is an argument for not taking on too much emerging markets exposure.

If you compare the fund's current holdings to its holdings from Sept. 30, which are available on PowerShares' Web site , you can see that the its geographical weightings have changed dramatically. At the end of the third quarter, it allocated 30% to China, compared with 19% now; 14% to Korea (which has a zero weight now); and 11% to Peru, which is currently weighted at 1.34%.

This illustrates an important point: Emerging markets are very dynamic. A fund that ranks stocks according to their relative strength in such a volatile asset class is going to change its holdings frequently -- at least it should be expected to. There is nothing wrong with that, but it begs a question -- should PIE be allowed to rebalance more than four times year? Three months strikes me as a long time to have to wait to bail out of a country if the investment criteria is relative strength, as opposed to a market cap weighting or fundamental weighting.

I often suggest waiting to buy an ETF until it has proven itself, but I don't think that necessarily applies here. DWA has proven, long before launching its first ETF, that it knows what it is doing. Whether PIE would serve as a proxy in your portfolio for broad-based emerging market exposure boils down, I think, to whether you think a product like this should be rebalanced more than four times a year.

You could argue that it's not in your interest to put arbitrary restrictions on a manager in whom you have faith and are willing to pay.

To be candid, there is no correct answer.
At the time of publication, Nusbaum had no positions in any of the securities discussed in this article, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.