Published:
September 10, 2007
PowerShares DWA Technical Leaders (NYSE: PDP, $24.99) -- 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 while using 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 has 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 (known as momentum) make it into the index.
Of
course, trends can change, 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, back-tested 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 hard-earned dollars into
it.
Nathan Slaughter
Editor
The ETF Authority
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About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
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Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
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