PIZ Invesco Trust II Invesco Dorsey Wright Developed Mkts Momentum

Given the surging market but the shaky underlying fundamentals, some are taking a different approach when it comes to investing this time around. While long-term value investing is ever popular, a few are looking to more technical approaches in order to play this market. Chief among these techniques are ones that focus in on charts, looking only at price movements instead of underlying company fundamentals.

While the techniques are often putdown and dismissed by more ‘traditional’ analysts, some are able to use them very effectively and profit of the chart patterns. Generally speaking chartists tend to believe in three key principles, (relatively) efficient markets, momentum, and repeatability. Basically, technical analysts often believe that everything is already priced in for a company’s stock, trends are hard to shake, and events are often cyclical; history tends to repeat itself and many fail to learn from this (read Three Technology ETFs Outperforming XLK).

The main problem with technical analysis, besides the assumption of efficient markets, tends to be that investors can see whatever they want to in many chart patterns. Changing the time period involved can often greatly influence a signal while there are literally dozens of different data points that investors can use, none of which are foolproof. Additionally, investors should note that there can be somewhat of a ‘self-fulfilling prophecy’ for charting strategies; if enough people are implementing the techniques they will certainly come true, although it will be impossible to tell if the chartists themselves made the trends come true.

Nevertheless, charting can be a powerful tool in an investor’s arsenal and can often help many to see burgeoning trends more clearly. Unfortunately, the techniques can be hard to learn and take some practice in order to develop a reasonable system that works. For those who are unwilling or unable to develop their own technical analysis ideas, but like the strategies nonetheless, a few funds from PowerShares could allow investors to broadly implement some of the basic strategies in their portfolios (read Does Your Portfolio Need A Hedge Fund ETF?).

Investors actually have three choices in the space, targeting distinct markets. All three also use a variety of metrics in order to implement their technical analysis strategies, focusing in on relative strength characteristics, as constructed by index provider Dorsey Wright. For those who are intrigued by this strategy, we have highlighted some of the key points from the products below:

DWA Technical Leaders Portfolio (PDP)

For investors seeking to make a technical play on the U.S. market, PDP is an excellent choice. The fund takes relative strength characteristics into account—among other factors, in order to select roughly 100 securities for inclusion in the fund. With this focus, the product has amassed over half a billion in AUM while charging investors 70 basis points a year in services. Top individual holdings include Apple (AAPL) so no big surprises there, but after that Priceline.com (PCLN), Silgan Holdings (SLGN), Liberty Media Corp (LMCA), and American Tower Corp (AMT) round out the top five (see Three Low Beta Sector ETFs).

Overall, the fund currently has a tilt towards consumer discretionary firms (28.4%), although industrials (21.7%), materials (11.4%) and technology (10.1%) make up double digit weightings as well. Unfortunately, with the focus on some low yielding sectors, the fund may not be a great destination for income, paying out a paltry 0.4% in 30 Day SEC Yield terms. However, the product has gained 2.2% over the past year compared to a 1.4% gain for SPY in the same time period. This suggests that even with the higher fees of PDP, the product has outgained broad market cap weighted funds over some time periods, although it has underperformed in recent months.

DWA Developed Market Technical Leaders Portfolio (PIZ)

If investors are looking to make a broad play on developed markets, across four continents, PIZ could be a quality pick. Much like its U.S. focused counterpart, PIZ holds 100 securities and focuses in on relative strength characteristics as the basis of its research. However, investors should note that the product has seen less in asset inflows and charges more, coming in at 80 basis points a year in fees (read Five Cheaper ETFs You Probably Overlooked).

In terms of top countries, the UK, Australia, and Canada, make up the top three, while the product is heavily tilted towards large cap stocks for its exposure. Sector holdings are pretty spread out as five sectors make up at least 10% of assets. At the top, industrials make up 20.5% of the fund while the two consumer segments combine to make up about 29% as well. Unfortunately, the product has managed to underperform its broad based counterpart, losing about 15.6% over the past year compared to 11.9% for EFA in the same time frame. Furthermore, many shorter time frames are hardly friendlier to the ETF, suggesting that it has struggled to make up for its higher expenses although it does pay out a decent yield of 1.7% in the process.

DWA Emerging Markets Technical Leaders Portfolio (PIE)

In order to play emerging markets with technical analysis, PIE could offer investors quality levels of exposure. The product holds about 100 securities in its basket focusing in on markets from around the world including those in Asia, Europe, Latin America, and Africa. The fund does charge a rather high 90 basis points a year in fees but it does have almost $180 million in AUM, suggesting reasonable bid ask spreads (see Three Overlooked Emerging Market ETFs).

For country exposure, the fund has a definite focus on emerging Asia, as four of the top five allocations come from that region of the world. These top destinations are led by Malaysia at 19.1%, South Korea at 16.4% and then Latin America’s top entrant with Mexico at 15.5% of the fund.  From a sector perspective, industrials take the top spot at a little over one-fifth of the assets while consumer sectors each have about 18.4% and materials round out the top four with 11.3% of the total. Performance trends in the emerging markets space, however, look to favor this fund over its broad based counterparts like VWO or EEM. Yet, with that being said, VWO has beaten out PIE over shorter time periods, especially when taking into account PIE’s relatively high fees.

Conclusion

Given that PowerShares has ETFs in each of the three distinct markets, investors can begin to see some trends that have developed. First, the broad technical strategy that PowerShares is implementing seems to work better in light bear markets with oscillating trends. This is evidenced by PDP beating SPY over the long term but falling behind as of late as the U.S. market has rallied. Additionally, the strategy seems to be doing poorly in strong bear markets, like in the case of developed markets over the past few months and years.

Obviously, these are all just generalizations and investors need to take these conclusions with a grain of salt. There is no reason why the trends outlined above will continue anymore than the trends that technical analysts follow on a regular basis. However, with that being said, the products could produce strong performances when markets are not trending in one direction or another. That is because these funds seem built to find trending securities in their underlying benchmarks, possibly allowing them to outperform during these uncertain times.

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Author is long VWO.

 
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