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Comparing PTH to Its Benchmark, the S&P 500 Index

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Sep. 17 2015, Updated 9:30 a.m. ET

A successful strategy

The PowerShares DWA Healthcare Momentum ETF (PTH), a smart beta ETF, selects its stocks from the healthcare sector. Its benchmark is the S&P 500 Index (SPY). As PTH is a sector-specific fund, SPY is much more diversified than PTH.

The five-year annualized return of PTH is 21.0%. SPY comes in at 15.75%. Clearly, PTH’s smart beta strategy has outperformed the market.

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Healthcare sector

PTH selects only those stocks that exhibit high momentum. The top five holdings of PTH are Regeneron Pharmaceuticals (REGN), Allergan (AGN), Cigna (CI), Incyte (INCY), and Medivation (MDVN), representing 24% of PTH.

As a sector-specific fund, PTH is riskier than SPY, one of the most diversified equity ETFs. Healthcare is one of the top performing sectors overall, and healthcare-focused ETFs like PTH, PBE, and PJP have been some of the most successful funds in the market.

Conclusion

Biotechnology stocks are risky, and pharmaceutical stocks tend to perform well but are also inconsistent. Nowadays, a stock’s momentum is given substantial consideration by analysts who are looking to determine future price movement. Momentum gives analysts a sense of the speed at which a stock may rise or tumble in the market.

Using momentum as a strategy for stock selection is beneficial, as stocks with high momentum are closest to a leading indicator. They observe market data faster than other stocks. This also makes them risky.

PTH’s portfolio is comprised mainly of biotechnology and pharmaceutical stocks that are chosen on the basis of momentum. PTH offers an option for investors who are willing to take a risk as they look to diversify their portfolio by investing in the healthcare sector.

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