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Ang Invesco DWA Technology Momentum ETF (PTF) is an approximately $ 458 million fund designed to track outstanding performers from the NASDAQ US Benchmark tech cohort selected for the Dorsey Wright Technology Technical Leaders Index.
PTF has a smart-beta approach, with stock weights depending on their momentum scores calculated by the index provider. For 60 bps, investors gain exposure to a portfolio that covers high-quality growth stocks that show strong momentum characteristics (i.e., continue to oppress their peers), even if there is an unintentional bias in rich prices, which we will discuss in more depth below using the power of Quant data.
Given the tremendous momentum and great expectations, this should be a boon for investors looking for strong returns, especially considering its attractive past performance powered by factors that are also leading the way. contributed to the S&P 500’s (IVV) and Nasdaq 100’s (QQQ) sterling run. Although relatively expensive, the fund delivered a ~ 23.4% compound annual growth rate from January 2015 to December 2021, leaving QQQ far behind, especially IVV.
PTFs, IVV, QQQ CAGR Portfolio Visualizer
There is no doubt that its investment strategy worked hard in the 2010s, with outperformance continuing into the 2020s, as the market favored the triumvirate factor built on tech, growth, and momentum. Unfortunately, that’s not a winning combination right now, when investors are considering the effects of higher interest rates for high-growth players.
In general, I chose a neutral stance, because the risks posed by growth premia becoming slimmer still depend on speculative play, and it is questionable whether substantial exposure to the quality factor can protect the NAV of the fund from further decline after a rough start to 2022.
Investment strategy
Please note that the ETF started in 2006 underwent changes in February 2014. As described in the press release from December 18, 2013, the former name PowerShares Dynamic Technology Sector Portfolio has been replaced by the PowerShares DWA Technology Momentum Portfolio. In 2018, the PowerShares brand was removed.
The change is not only cosmetic but fundamental, as the approach has also been recalibrated: SEC filing shows that the former underlying index was the Dynamic Technology Sector Intellidex Index.
In this regard, below, I will discuss its returns from January 2015 to December 2021, which represent seven full years of trading, and not since it began.
The current benchmark of the fund, DWA Technical Leaders, is, in essence, a fraction of the NASDAQ US Benchmark Index. The selection pool covers 2,000 equities with the highest market value, of which at least 30 tech players could qualify for the underlying PTF index if they pass a proprietary momentum test. As explained on page 5 of the methodology, among the considerations are “intermediate and long-term price movements relative to a representative market benchmark.” The index is reconstituted and rebalanced every quarter, so PTF’s increased turnover is not surprising.
Holds
As of January 14, the fund’s portfolio consisted of 39 stocks. We see only two members of the $ 1 trillion league, Apple (AAPL), the leading investment fund with ~ 5.3% weight, and Microsoft (MSFT), which is only in 15th position with ~ 2.5% that part of net assets. The difference is usually due to the momentum score applied to the weighting process.
Moreover, two mid-caps can be seen among the top ten holders, Synaptics (SYNA) and Lattice Semiconductor (LSCC). Both had impressive runs in 2021 but have retreated from high levels this year amid widespread weakness in tech stocks.
The smallest company in the mix is Arlo Technologies (ARLO), with a market value of just ~ $ 814 million. Overall, the fund has approximately 41% allocation to medium and small companies.
Factor analysis usually has no unexpected findings, other than quality. Allocations to growth at value is completely disproportionate, where most net assets are invested in stocks with the highest growth (over 50%), and only ~ 12% are in shares with comfortable valuation profiles. I must acknowledge that this is in line with the fund’s focus on momentum and tech.
Additionally, overheated names that cost a premium compared to the traditional expensive tech sector have close to 65% weight. Overall, that’s not a completely safe combination for 2022 with consistent restrictions on the horizon, to say the least.
What certainly surprised me was that PTF has a solid exposure to the quality factor despite its massive footprint in the mid-cap universe mentioned above. In many cases, speculative momentum tech players are making money, with little or no existing profits and unstable margins, let alone adequate capital gains.
However, PTF’s portfolio is skewed among high-quality companies, with a share of those boasting Quant Profitability scores above or equal to B- close to 81%. The allocation in the A league is over 57%, a solid result; seven stocks still earned the highest possible rating, A+, including AAPL, AMD, NVDA, MSFT, KLAC, INTU, and HPQ. This should alleviate a bit of the risks for the highly uncertain 2022, even if it just certainly doesn’t make this fund a Buy.
Quant dashboard for key 20 PTF holdings Created by the author using data from PTF and Seeking Alpha
Finally, almost all PTF equities have solid momentum, with 89% allocated to stocks with A grades, and only one with a C grade, similar to ServiceNow (NOW).
Another way of saying, almost all of its investments have stronger three, six, nine, and twelve month returns compared to the technology sector. For example, below are four metrics that influence SYNA’s Momentum grade.
SYNA momentum grade and underlying metric Looking for Alpha
To bring a little more color, 21 stocks in its portfolio delivered a one -year return to the top 50%, along with GDYN, SYNA, FTNT, and NVDA that boast triple-digit returns. Only one company has seen its share price increase in one digit, it is NOW. But YTD’s performance isn’t much color. 31 stocks had a negative return, with CALX being the weakest, with the share price down 32% since the beginning of the year. The performance of Vocera (VCRA) in 2022 is a bright spot, but there is a caveat; its 22% growth in share price represents the market’s reaction to its acquisition by Stryker (SYK).
Final thoughts
PTF has a really impressive 7-year comeback, but the issue here is that it’s fueled by an impressive 2020, while other years have been less impressive, especially in 2021 when it didn’t perform in the same 500 bellwether and Nasdaq 100 cohort.
PTF, IVV, QQQ return comparison Portfolio Visualizer
It’s pretty frustrating for a fund with a strategy that revolves around momentum.
PTF, IVV, QQQ return comparison Portfolio Visualizer
In fact, PTF has only beaten IVV and QQQ twice since 2015, especially in 2019 and 2020. So the meteoric price increase in 2020 was the main contributor to its 7-year CAGR of ~ 23.4%.
It asks whether the strategy is capable of delivering massive profits when top drivers, such as very loose monetary policy, are no longer relevant.
Moreover PTF is expensive, with high Risk. Its turnover was large, 172%, on the prospectus. Another fact worth mentioning is that it doesn’t make distributions right now; I’m not surprised because only 11 stocks in its portfolio pay the dividend, while 10 yield sub-1%.
Dividend -paying stocks from the PTF portfolio Created by the author using data from PTF and Seeking Alpha
Considering everything, since I expect 2022 to be a slow year for expensive technology as I outlined in some of my recent articles, I give this ETF a Hold rating.