Posted on 06/12/2012
In past posts (“Relative Strength vs. Value-Performance over Time”and “Relative Strength, Decade by Decade”), I’ve used the Ken French database’s relative strength portfolio. While this is useful in concept, what solidifies the findings in my previous posts is the similarity between Ken French’s High RS data and one of our ETFs, PDP.
PDP is a PowerShares ETF based on the Dorsey Wright Technical Leaders Index. It has its own proprietary calculation method, which is different than that of the Ken French database. Yet, over the past five years, both have performed very similarly.
PDP has only been on the market since March of 2007. Yet, over those five years, the two indexes have performed almost exactly the same…no small feat considering the stock market over the last few years. Imagine, then, using the Ken French data as a “loose proxy” for PDP going back decades. We’re not saying the two will always perform the same—we’re just pointing out that it’s clear both indexes are exploiting the same factor (RS) in a practical way.
Currently, relative strength growth rates (10-year rolling returns) are at some of the lowest levels since the 1930s; and historically we can see that growth rates often increase once they hit rock bottom. That may bode well for relative strength returns going forward.
See www.powershares.com for more information about PDP. Past performance is no guarantee of future returns. A list of all holdings for the trailing 12 months is available upon request.
This article originally appeared on the Systematic Relative Strength blog.