A number of smart products are coming into being in the ETF industry lately. Issuers are trying to offer the best possible strategies to win in the current investing environment. With the U.S. economy gaining traction, the focus has shifted to growth and momentum investing considerably. Probably, this is why ALPS has launched a product - ALPS | Dorsey Wright Sector Momentum ETF (NASDAQ:SWIN) - based on the sector momentum technique.
The fund looks to track the performance of the Dorsey Wright US Sector Momentum Index. The index shortlists stocks first at the macro level using the GICS sector index returns (excluding Real Estate) to filter sectors with the highest momentum.
After picking three sectors with the highest momentum, it puts about 20% weight on a sector. Each sector is likely to have around 10 stocks with about 2% weight each. Then it selects four highest momentum sectors, applying about 10% weight to each and around 2% weight to the five stocks selected from each sector. The index rules out the lowest momentum sectors.
As of January 6, 2017, the index constituent showed that information technology (20.2%), industrials (20.01%) and consumer cyclical (19.94%) had 10 stocks each while healthcare (10%), financials (9.97%), energy (9.95%) and basic materials (9.91%) had five each.
As of January 13, 2017, the fund holds 52 stocks in total. None of the stocks accounts for more than 2.35% of the fund. TESARO, Inc. (NASDAQ:TSRO), The Ultimate Software Group and Amazon.com (NASDAQ:AMZN) are the top three stocks of the fund. The fund charges 40 bps in fees.
How Does It Fit in a Portfolio?
The fund is an intriguing option for investors eyeing momentum plays on the high-flying market segments. Momentum investing is a fascinating idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks which are sizzling on the market.
This is especially true for the U.S. market as the sentiments are pretty bullish at the current level, courtesy of Trump-induced optimism. His promises for tax cuts, fiscal boost, easing regulations and job creation may do wonders for some U.S. equity sectors.
Moreover, the Fed is on a policy tightening mode. It enacted a rate hike in December 2016 and intends to raise rates thrice this year. This will help sectors like financials gain significantly while a few are likely to lose. In the view of such factors, momentum plays with a focus on sector investing could be a great idea.
This is not the first time that investors get access to momentum ETFs. The Dorsey Wright technique that ALPS is using now has already been used by First Trust. Notably, First Trust Dorsey Wright Focus 5 ETF (NASDAQ:FV) gives exposure to five First Trust sectors and industry-based ETFs that Dorsey, Wright & Associates (DWA) finds the best to beat the other ETFs in the selection universe.
However, the difference is that FV is an ETF of ETFs while SWIN is made up of stocks. Meanwhile, momentum ETFs like iShares Edge MSCI USA Momentum Factor ETF (BATS:MTUM), SPDR Russell 1000 Momentum Focus ETF (NYSEARCA:ONEO) and PowerShares DWA Tactical Sector Rotation (NYSEARCA:DWTR) may pose competition to SWIN.
In fact, DWTR is also based on the Dorsey Wright strategy and gives exposure to the strongest relative strength sectors in the U.S. through nine PowerShares DWA sector Momentum ETFs. DWTR is also a fund of funds.