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Double the S&P with this Unique Fund |
Published: September
20,
2007
PowerShares DWA Technical Leaders (NYSE: PDP, $26.34)
-- When evaluating the merits of an investment, most of us rely
on fundamental analysis: sales, earnings, profit margins, P/E
ratios, etc. However, a number of investors subscribe to a
completely different philosophy that attempts to forecast
near-term stock movements based on charts and various
indicators.
These chartists, otherwise known as technical analysts, pay
close attention to things like moving averages, trading volume,
and support/resistance levels. They also use an array of
mathematical indicators to determine whether a stock or index
should be bought or sold.
Until lately, followers of technical analysis were basically
shut out of the world of ETFs and closed-end funds. However,
PowerShares recently launched a new ETF based on the work of
Dorsey Wright (a prominent technical analyst). Specifically, the
fund tracks an index comprised of 100 stocks showing superior
relative strength characteristics. In other words, only the
stocks that have posted the strongest gains relative to their
benchmark (stocks with strong momentum) make it into the index.
Of course, trends can change quickly, so the index is re-configured
every quarter. At the moment, it is heavily tilted towards
mid-cap growth stocks, which represent more than half of the
fund's assets. Top holdings include Titanium Metals (NYSE: TIE),
American Tower (NYSE: AMT), and Energizer Holdings (NYSE: ENR).
While the fund itself is new,
backtested
data suggests the index it tracks stands a pretty good chance of
outperforming the broader market. In fact, the Dorsey Wright
Technical Leaders Index would have more than doubled the return
of the S&P 500 over the past ten years.
Our View --> We are
generally skeptical of momentum-based investing, which relies on
the theory that there will always be someone around to pay more
for a stock than you did. Clearly, market leadership can and
does rotate from time to time.
However, we are also aware that many investors chase returns,
meaning hot stocks attract interest and can get even hotter. If
this index can nimbly identify market winners, ride them to a
peak, and then dump them before they lose favor, then it could
do well. However, that is a tall order, and it seems prudent to
see the fund in action before investing your hard-earned dollars. Good investing!
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Nathan Slaughter
Editor
The ETF Authority, Half-Priced Stocks
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Income Security
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