Does 'Technical Leadership' Matter in Your Emerging Market ETF?

Do strategic ETFs add value to portfolios?

Near the bear market's inception in November 2007, I noted that a wide variety of "strategy ETFs" were outperforming the benchmark S&P 500. At least "strategy ETFs" had the edge at that moment in time.

In April of this year, 2009, I talked about why the Powershares G10 Currency Harvest Fund (DBV). I explained that it would likely capitalize on shorting the yen and the dollar while reinvesting in the currencies of Australia, Norway and New Zealand.

Dividend rotation, sector rotation, technical leadership, carry trade investing, market neutral. These are just a handful of strategic methods that can lead to successful investing outcomes. Yet with all of the focus shifting to emerging markets, it makes sense to evaluate whether the PowerShares DWA Emerging Markets Technical Leaders Fund (PIE) has been helpful or harmful since its introduction 18 months ago.

The Emerging Markets Technical Leaders Fund (PIE) tracks an index comprised of approx 100 companies in emerging growth countries. The list includes companies in countries from BRIC nations, MENA nations, most of Southeast Asia, Latin America and Eastern Europe.

The most recent information on PIE shows that 28% of the fund is dedicated to Chinese companies. Meanwhile, another 44% goes to Southeast Asia. By itself, this is not a bad thing... and it likely reflects "technical strength" in the region so far this year.

That said, PIE has been unable to justify its annual percentage of 0.90 so far. I say this for several reasons. First,a strategic fund provides "alpha" to the extent its giving you something other than general market performance. "Why else would you use it?" So when PIE is showing a 98% correlation with general emerging market performance in iShares Emerging Markets (EEM), it's hard to believe your getting something that is truly different with PIE.

Second, if the performance on non-strategic EEM is far superior to that of PIE, why would I embrace the strategic PIE? Granted, it's only been 18 months. Yet the strategic element should provide a "pop" to performance to embrace the idea that the "strategy" is sound. The evidence thus far is underwhelming.

Full Dislcosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.