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An ETF I wasn't familiar with showed up on the ETF Trend Performance Report at Alert HQ this weekend. At the top of the list, with an improvement of 2.5 points out of a total of 6 possible points, was the PowerShares XTF: Dynamic OTC Portfolio (PWO).

This ETF is not based on the typical market cap weighted passive index. PWO is based on the Dynamic OTC Intellidex. This is an "active" index that selects holdings based on a variety of investment criteria including fundamental growth, stock valuation, investment timeliness and risk factors. In other words, this ETF is an actively managed fund, whether managed by computer or by a human investment committee, the literature does not say. In any case, the goal is to provide alpha beyond what the typical ETF would offer.

The following diagram, from the PowerShares Dynamic ETF prospectus shows how the selection process is handled:

Click to enlarge images

The 5-year return of the Dynamic OTC Portfolio ETF may not be especially impressive when compared to the NASDAQ Composite, but over the course of the last year, PWO has indeed outperformed the NASDAQ as shown in the chart below:

In terms of market cap, this ETF is currently holding roughly 37% mid caps, 35% small caps and the remainder in large caps. With respect to styles, PWO is clearly over-weight growth stocks as opposed to value stocks.

This Intellidex approach to selecting stocks for this ETF seems to be working for the time being. As we all know, markets change and what used to be successful can lose its luster. But for now, PWO is trending strongly bullish. Investors should take notice.

Disclosure: no positions

Source: Last Week's Top Trending ETF: PowerShares Dynamic OTC