A Comparison of a Momentum ETF and the Volatility Index



The PowerShares DWA Healthcare Momentum ETF

Momentum is the rate at which a stock moves up or down. There are various momentum smart beta ETFs available. The PowerShares DWA Healthcare Momentum ETF (PTH) is one such ETF. It seeks to mimic investment results of the Dorsey Wright Healthcare Technical Leaders Index. This index selects stocks based on their momentum with respect to its peers. PTH’s top five holdings are Regeneron Pharmaceuticals (REGN), Allergan (AGN), Cigna (CI), Incyte (INCY), and Medivation (MDVN). PTH has maximum allocation to the biotechnology sector. PTH’s underlying index consists of 30 healthcare stocks with relatively high momentum. The momentum of each stock is measured in relation to its benchmark or peers.

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The VIX versus PTH

The above graph compares the performance of PTH and the CBOE (Chicago Board Option Exchange) Volatility Index (VIX). The chart shows that the VIX was at its peak during the financial crisis of 2008–09. The momentum fund PTH was launched two years prior, in 2006. Since 2009, PTH has shown upward movement. During 2008–2012, when the VIX was more volatile, PTH had a slower growth rate. But after 2012, PTH’s growth rate increased tremendously due to the VIX’s increased stability.

The VIX’s effects on momentum and minimum volatility stocks

Momentum stocks are only affected by a significant rise or fall of the VIX, unlike minimum volatility stocks, which are affected by even a minor change in the VIX. The VIX is a measure of the overall implied volatility of the market. Next, we will analyse the performance of dividend-yielding stocks with respect to the VIX.


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