The PTH-DWAQ connection
The PowerShares DWA Healthcare Momentum ETF (PTH) is a smart beta fund that tracks the investment results of the Dorsey Wright Healthcare Technical Leaders Index. Healthcare stocks are a combination of the pharmaceutical and biotechnology sectors. It’s well known that the PowerShares DWA NASDAQ Momentum ETF (DWAQ) includes the majority of the healthcare stocks issued in the United States.
As you can see in the graph below, PTH and DWAQ have followed similar trends in 2015. PTH has a higher beta than DWAQ because it’s a pure sectoral equity fund, and its trend movement is more significant than DWAQ’s.
Momentum is a major factor for stock selection
PTH selects stocks by the momentum they exhibit. Momentum stocks are more aggressive and riskier than traditional stocks. They tend to give big gains to investors during rising markets but are equally loss-making during falling markets. DWAQ, on the other hand, is a market capitalization-weighted index.
Smart beta funds are a hybrid of active as well as passive management funds. Biotechnology stocks are risky, and pharmaceuticals stocks have performed well over the years but are inconsistent. Nowadays, analysts consider the momentum of a stock to determine the future price movement. It shows the speed at which a stock may rise or tumble in the market.
Using a momentum 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 and thus are risky to deal.