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The Nasdaq Dorsey Wright Technical Leaders Index suite is constructed using the Nasdaq Dorsey Wright’s Technical Leaders methodology, designed to identify companies that demonstrate powerful relative strength characteristics from within a given broad market universe or sector. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe. The Technical Leaders Indexes and the Invesco funds that seek to track the Indexes are rebalanced and reconstituted quarterly.
So with the change from one quarter to the next, we have once again reconstituted and rebalanced the Dorsey Wright Technical Leaders Indices. This article will focus specifically on the two broad US equity Technical Leader Indices that underlie the Invesco DWA Momentum ETF (PDP) and the Invesco DWA SmallCap Momentum ETF (DWAS).
Despite the general weakness seen in small caps so far this year, we saw (and have continued to see) momentum-based strategies such as the Dorsey Wright SmallCap Technical Leaders Index hold up better on a relative performance basis. Below you'll find a complete review of the changes that were made to each index with the most recent reconstitution. Keep in mind that positions that have been removed from each index no longer maintain characteristics of superior relative strength. Meanwhile, additions are areas that have improved to a place of leadership, and may even be ideas to consider on an individual stock basis.
Market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. Performance data quoted represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data quoted. Fund performance reflects applicable fee waivers, absent which, performance data quoted would have been lower. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
The Dorsey Wright Technical Leaders Index
The stock-selection process behind the Dorsey Wright Technical Leaders Index is quite simple yet robust. Every quarter, we apply the relative strength process to compare approximately 1,000 large and mid-cap US stocks and select the strongest 100 names. The main goal of the quarterly reconstitution process is to consistently weed out the weak names and realign the portfolio toward strength. With this most recent reconstitution and rebalance, we removed 33 stocks from the Index and added 33 new stocks (compiled in the table below). One of the more interesting observations is the "Average Technical Attribute Reading" for the two lists. As of 7/2/2020, the 33 stocks added to Technical Leaders Index this quarter have an average technical attribute rating of 4.58 while the 33 stocks removed from the portfolio have a weaker average attribute rating of 2.97. Moving into Q3 2020, the average technical attribute rating for the stocks within the Dorsey Wright Technical Leaders Index is now a favorable 4.36.
Dorsey Wright Technical Leaders Index Attribution Stats (as of July 2, 2020):
- Technology is currently the most significant sector weighting in the Technical Leaders Index at approximately 32%, followed by Industrials at 21% and Healthcare at 15% (source: Invesco).
- Out of the 33 stocks added, the Technology and Consumer Cyclical sectors tied for the largest amount of additions at around 30% each.
- Of the stocks that have been removed from the Technical Leaders Index, DFS was the worst-performing last quarter with a loss of -57.95%.
- Healthcare accounted for the majority (30%) of the Index's removals this quarter.
- 21 of the new additions to the Index this quarter are perfect 5 for 5'ers and 100% of the stocks are trading in a positive trend (as of July 2, 2020).
Dorsey Wright SmallCap Technical Leaders Index
The Dorsey Wright SmallCap Technical Leaders Index selects approximately 200 of the highest relative strength names from a universe consisting of roughly 2,000 US-listed small-cap stocks. During the most recent update, 131 stocks were removed and 131 stocks were added. As with the large and mid cap-focused Technical Leaders Index, there is a notable difference in the average technical attribute tally of the additions relative to the deletions. Specifically, the average technical attribute rating for the removals is 2.51 while the average attribute rating for the additions is a much stronger 4.38 (as of 7/2/2020). With these changes, the average technical attribute rating for the current holdings of the SmallCap Technical Leaders Index is 4.29.
Dorsey Wright SmallCap Technical Leaders Index Attribution Stats (as of July 2, 2020):
- Healthcare made-up the largest concentration of new additions to the Index, accounting for roughly 33.1% of the new stocks present this quarter. Consumer Cyclical and Industrials accounted for 19.2% and 16.9%, respectively.
- As we enter Q2 2020, the SmallCap Technical Leaders Index is overweight Healthcare at approximately 35%, followed by Technology at 18% (source: Invesco).
- The Healthcare sector saw the most removals from the Index this quarter with a total of 44 stocks.
- 82 of the stocks added to the SmallCap Technical Leaders Index are perfect 5 for 5'ers.
Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.
Nasdaq Dorsey Wright receives licensing fees based on assets invested in the exchange traded funds listed above.
Unless otherwise stated, the performance information included in this article does not include all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security or a recommendation to engage in any transaction or participate in any strategy. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.
Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset, or strategy.