Posted on 02/26/2013
As you know, we launched the Small Cap Technical Leaders Fund (DWAS) last July, which invests in 200 US Small Cap securities out of a universe of about 2000 candidates. We use relative strength as the primary factor in constructing that index. The latest launch from PowerShares, the S&P Small Cap Low Volatility Fund (XSLV) uses a volatility screen to pull out 120 US Small Cap securities from a universe of about 600. High Relative Strength and Low Volatility have very little in common, aside from proven alpha over time. The portfolios are built very differently, and thus own very different things. There are currently only 12 stocks that are common to both DWAS and XSLV today for instance. However, the portfolios are so different that they offer a complimentary relationship that investors may find quite attractive. We'll talk a bit more about this later this week, but the graphic below shows the results of a portfolio test we have run based upon the historic index data for the strategies that guide both DWAS and XSLV. Both appear to offer a superior return profile when compared to a common benchmark, the Russell 2000 Index (RUT), and a portfolio blended evenly between DWAS and SPLV actually offers slightly better returns than does either on their own during our study period. Again, we'll look a bit deeper into the relationship between the High RS and Low Volatility strategies, but wanted to bring the idea to your attention today. Both of these funds are relatively new products, but certainly aren't new concepts. Putting them together might be another way to offer a little more differentiation in a market that continues to reveal US equities as a leadership asset class, and Small & Mid Caps stocks as the strength within it.