Posted on 07/10/2012
One ETF that can provide you with exposure to the strongest 100 stocks within the US Equity market (out of a universe of about 1000) is the PowerShares DWA Technical Leaders Portfolio (PDP). In fact, the latest portfolio reconstitution for our Technical Leaders lineup took place at end of the 2nd quarter; so just last week. Every quarter the DWA Technical Leaders Index goes through a rebalancing process during which time the index weeds out those stocks that are not performing, and replacing them with stocks that are exhibiting superior relative strength characteristics. During the most recent quarterly rebalancing there were 30 stocks removed from the DWA Technical Leaders Index and 30 new stocks were added to the index. So, while 30% of the PDP holdings have turned over from quarter-to-quarter, 70% of the stocks that were in the index coming into the second quarter are remaining in the index heading into the third quarter.
Based on the addition and deletion of stocks throughout the year, from quarter-to-quarter, sector leadership trends often emerge. Interestingly enough, the sector that saw the largest increase in weighting from quarter-to-quarter was the Financial Sector, which increased from 9.85% to a current weighting of 15.17%. The majority of Financial stocks are not the traditional, big money center banks, rather they are going to be REITs and credit card companies like Mastercard (MA) and Discover (DFS). Another notable observation from the recent quarterly rebalance of the PDP holdings is the fact that exposure to the Energy Sector is now non-existent as the three remaining Oil and Oil Service stocks were removed from the index. PDP did not come into the quarter with a large weighting towards Energy; to state, Energy was the most underweighted sector for the PDP, compared to the S&P 500, as it only had a 1.77% weighting at the beginning of the 2nd quarter.
The Consumer Cyclical sector, while still the single largest, saw the biggest decrease in weighting, losing 5.49% and now down to a current exposure of 27.65% in the PDP, while the second largest sector (Industrials) contracted 2.98%.
In addition to looking at the individual stock changes, it can also be beneficial to take more of a bird's eye view of the changes by observing the differences in sector weightings that have occurred. We can compare the PDP's weightings to those of the S&P 500 Index to demonstrate the differences between a relative strength driven index-weighting methodology versus a simply cap-weighting strategy.
Using the most recent weightings (7/6/12) of the funds themselves, when we compare the PDP against the SPDR S&P 500 ETF (SPY), we find that there are some significant differences to note. First and foremost, SPY's largest weighting is in the Technology sector at 18.04% while PDP offers a relative underweight to this area at 12.88%. Meanwhile, despite contracting a bit, the Consumer Cyclical sector remains the largest weighting (27.65%) in the PDP, and is more than twice the Consumer Cyclical weighting for the SPY which is just 13.33%. A bulk of the Consumer Cyclical stocks in the PDP hail from the Retailing and Restaurant sectors. The Industrial sector in the PDP is nearly twice the weighting of the Industrial Sector in the SPY, 19.17% versus 11.85%. We mentioned the improvement in the Financial Sector during the most recent quarterly rebalance. As a result this sector has moved to a market weighted position with the SPY as there is less than 1% difference between the Financial Sector weighting in the PDP and the Financial Sector weighting in the SPY. The biggest underweight in the PDP in terms of sectors is the Energy sector as this sector has a 0% weighting in the PDP and a 10.26% weighting in the SPY. Also, Healthcare is a notably underweighted sector as it is just 4.85% in the PDP versus 11.25% in the SPY.
Another notable observation from the current breakdown of the PDP is the size and style breakdown. Over the past couple of years PDP has been very overweighted towards the Growth area of the market, particularly Mid Cap Growth. However, Mid Cap Growth only accounts for 21.71% of the PDP and the Mid Cap Value is actually a bigger weighting at 34.19%. Large Cap Growth is the next biggest weighting in the size and style breakdown at 29.31%. So, PDP is now only slightly overweighted towards Growth vs. Value (52.37% vs. 46.12%) and Large Cap has garnered 40.57% exposure in the PDP while Mid Cap is at 55.90%.