ETF.com Webinar: H2O Investing: Combining the Best Elements Within Smart Beta

Transcription

1 ETF.com Webinar: H2O Investing: Combining the Best Elements Within Smart Beta Sponsored by:

2 Panelists: Dave Gedeon Vice President Nasdaq Jay Gragnani Vice President Dorsey Wright & Associates

3 Moderator: Drew Voros Editor-in-Chief ETF.com

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7 Thank You.

8 H2O INVESTING: COMBINING THE BEST ELEMENTS WITHIN SMART BETA May 6 th, 2015

9 INDEX BUSINESS STEADY GROWTH Nasdaq acquires Dorsey, Wright & Associates NASDAQ Composite 1985 NASDAQ-100 NASDAQ acquires OMX Exchange Change name to The NASDAQ OMX Group 2008 NASDAQ OMX acquires PHLX U.S. All Market Family (NQUSA) 2013 Dividend and Income Family BulletShares Family 2014 LadderRite Family Nasdaq AlphaDex 1999 PowerShares QQQ NASDAQ Sharia Family (N100S) Green Economy Family (QGREEN) 2012 Global Family (NQGI) Commodity Families (NQCI) 9

10 Nasdaq announces acquisition of Dorsey, Wright & Associates (DWA) on Jan 5, 2015 Bringing DWA indexes under the Nasdaq umbrella significantly expanded Nasdaq s smart beta offering into the momentum factor Single largest provider of single-factor, momentum indexes based on ETF AUM DWA was early adopter of Smart Beta in focusing on alternative weightings to augment performance via their proprietary tactical asset allocation models 10

11 Founded in 1987 Web platform utilized by thousands of financial advisers providing technical analysis, model portfolios, tactical asset allocation, and many other analytic tools Launched first index in 2007 as basis of exchange-traded fund focused on momentum via its proprietary relative strength methodology Expanded index business into new markets and turning its portfolio and tactical asset allocation into new indexes and licensed products 11

12 SMART BETA: BROADLY SPEAKING Alternative approach to existing benchmark or application of a particular market segment Screening, filtering, tilting, weighting Alter the risk/return profile of the benchmark via a systematic rule set that is repeatable and replicable Rules-based, transparent system overweighting, underweighting, tilting certain factors or fundamental metrics 12

13 NASDAQ & SMART BETA We are believers in the advent of Smart Beta bringing about opportunity for an altered approach to create investment results which better align with an investors needs and wants. The technological shift in investing and research have taken the alpha generated through active and brought it down to rules-based, objective methodologies which can be accessed at far lower fees. Nasdaq is a leader in the smart beta push with a focus on finding opportunity to exploit unique investment factors such as momentum, dividends, buybacks along with fundamental approaches that capture alpha opportunities through objective and rules-based indexes 13

14 WHY SO POPULAR NOW? Easiest answer on Smart Beta driving full force into investment lexicon is not just rooted in great returns or a raging equity bull market Active managers were original smart beta investors. Developed strategies to take advantage of known factors and fundamentals within marketplace Technology has removed information advantage for active managers coupled with a relentless drive for efficiency (lower fees) has led to rules-based, transparent approaches to target same principles active managers previously used Today with a Macbook and Quandl, anyone can create, test and market sophisticated investment strategies 14

15 SMART BETA IS NOT A Silver Bullet All Weather Perfect 15

16 TECHNOLOGY > ACTIVE A basic strategy of trend following overlaid two smart beta strategies generates significant outperformance versus a traditional active fund TACTICAL BALANCE AMERICAN FUNDS BALANCED /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/

17 MOST BASIC: MARKET CAP WEIGHT VS EQUAL WEIGHT Market Capitalization Weighted: The companies with the largest market capitalization have the largest weight in the index Equal Weighted: Has the same constituents as the market-cap index but each name is assigned an equal weighting Benefits of Equal Weight Easy to understand methodology Greater diversification potential Broader participation potential Maintains similar risk/return profile as market-cap counterpart Could be a double-edged sword because equal-weight reduces overexposure to mega-caps but also increases exposure to more volatile mid/small cap names Cap-weighted index often lean towards a growth style. Because equal-weight sells winner and buys laggards, it exhibits a value tilt 17

18 SNAPSHOT: NASDAQ-100 VS NASDAQ-100 EQUAL WEIGHT Annualized Returns Annualized Index Performance: Returns NDX vs NDXE 30% 25% NDX NDXE NDX INDEX NDXE INDEX % 15% 10% % 0% 1 Year 3 Year 5 Year 80 Annualized Volatility NDX vs NDXE: Current Sector Allocation 20% NDX NDXE 60% 50% NDX NDXE 15% 40% 10% 5% 30% 20% 10% 0% 1 Year 3 Year 5 Year 0% Technology Consumer Services Healthcare Consumer Goods Industrials Telecom Basic Materials Volatility tends to be higher with the equal weight index over time, reflecting the increased exposure to smaller-capitalization names. Sector allocations could differ significantly but reduces top heaviness 18

19 SNAPSHOT: S&P 500 VS S&P 500 EQUAL WEIGHT Annualized Returns Annualized Index Performance: Returns SPX vs SPXE SPX SPXE SPX INDEX SPXEWI INDEX 20% 15% 10% 5% % 1 Year 3 Year 5 Year Annualized Volatility SPX vs SPXE: Current Sector Allocation 20% SPX SPXE 25% SPX SPXE 20% 15% 15% 10% 10% 5% 5% 0% 1 Year 3 Year 5 Year 0% S&P 500 Equal Weight has outperformed the traditional S&P 500 over a 1, 3, and 5 year period 19

20 A LOOK AT METRICS Per Share Ratios: NDX vs NDXE NDX NDXE P/E Ratio Price-to-Book Price-to-CashFlow Per Share Ratios: SPX vs SPXE SPX SPXE 2.50% 2.00% 1.50% 1.00% 0.50% Underlying metrics (P/B, P/CF) do not differ much thus you are picking up free valuation premium which is the essence of smart beta. Dividend Yield NDX NDXE SPX SPXE 0.00% NDX NDXE SPX SPXE 20

21 MOMENTUM Momentum is an identified factor that has generated a stronger return profile than other factors The factor is based primarily on price change and is not rooted in fundamental metrics Momentum can be accessed via different approaches including pure price change, relative price change, and point-and-figure charts 21

22 Combining Return Factors 22

23 WHY RELATIVE STRENGTH? Stocks with the best momentum outperformed those with the worst momentum, both in absolute terms and relative to the entire equity market (Moskowitz, Tobias, Momentum Investing, 2010). The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. 23

24 RELATIVE STRENGTH RESEARCH The premier anomaly is momentum: stocks with low returns over the last year tend to have low returns for the next few months and stocks with high past returns tend to have high future returns. -Eugene Fama & Kenneth French ( Dissecting Anomalies June 2007) The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss. 24

25 STARBUCKS (SBUX) VS. S&P EQUAL WEIGHTED INDEX (SPXEWI) With Positive RS (4/7/1999 2/20/2007) SBUX: % SPXEWI: 87.55% SPX: 10.01% With Positive RS (3/16/2009 3/31/2015) SBUX: % SPXEWI: % SPX: % With Negative RS (2/20/2007 3/16/2009) SBUX: % SPXEWI: % SPX: % This example is presented for illustrative purposes only, and does not represent a past or present recommendation. The performance numbers are price returns, not inclusive of dividends, fees, or other expenses. Investors cannot invest directly in an Index like the SPX or SPXEWI, indexes have no fees. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss 25

26 THE DWA RELATIVE STRENGTH PROCESS The Teams The Games The Rankings 26

27 THE TECHNICAL LEADERS PROCESS Begin with a Universe Relative Strength Arm Wrestling Match Buy the Highest Ranked Stocks PowerShares DWA Technical Leaders (PDP) 3/1/07 Small Cap Technical Leaders (DWAS) 7/19/12 Technical Leaders ETFs Developed Markets Technical Leaders (PIZ) 12/28/07 Emerging Markets Technical Leaders (PIE) 12/28/07 27

28 WHAT DO TECHNICAL LEADERS LOOK LIKE? Both the performance and behavior of Momentum create an opportunity for diversification & added income through complementary strategies. High Relative Strength Stocks (i.e. momentum in academia) are negatively correlated with both value and low volatility stocks. Morningstar data: All periods greater than one year annualized. S&P 500 TR (Price) return as of 2/27/2015. S&P 500 TR USD (NAV) return as of 2/27/2015. PDP (Price) return as of 2/27/2015. PDP (NAV) as of 2/27/2015. Mid-Cap Growth (Price) as of 2/26/2015. Mid-Cap Growth (NAV) as of 2/26/2015. Past performance not indicative of future results. Potential for profits is accompanied by possibility of loss. 28

29 WHAT DOES LOW VOLATILITY LOOK LIKE? vol a til ity [vol-uh-til-ity] Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations over time. Source: Morningstar The PowerShares S&P Low Volatility Funds invest in common stocks (and ADRs) that represent the securities with the lowest realized volatility over the past 12 months within their investment category. 29

30 COMBINING HIGH RS & LOW VOLATILITY PowerShares DWA Technical Leaders (PDP) and PowerShares S&P Low Volatility (SPLV) PDPSPLV is a 50 / 50 split between the PDP and SPLV, rebalanced once a year. Combined Portfolio Dividend Yield of 1.3% 190 US Large & Mid Cap Holdings 10 yr. Back-test (Avg. Ann. Return, thru 3/25/15) PDPSPLV: +7.71% SPX: +5.81% Standard Dev. (3yr) PDPSPLV: 8.52% SPX: 8.95% Performance data for PDPSPLV prior to the model s inception date (05/09/12) is the result of back-testing. Data for PDPSPLV after model inception date is model data. Performance data for SPLV prior to 05/05/2011 and PDP prior to 3/01/2007 is the result of backtested underlying index data. Investors cannot invest directly in an index, like the SPX. Indexes have no fees. The returns above do not include dividends, or all transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. Please see the disclosure slide for important information regarding back-testing and model performance. 30

31 MOMENTUM & LOW VOLATILITY SWITCHING STRATEGY The growth chart above is based on returns not inclusive of dividends or all transaction costs. Performance prior to each funds inception date (SPLV: 5/5/11, PDP: 3/1/07) are back-tested and based upon an underlying index. Performance of the RS switching methodology are also based on back-testing. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss. Please see the disclosure slide for important information regarding back-tested returns. 31

32 DISCLOSURES Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document and presentation do not purport to be complete descriptions of the securities or commodities, markets or developments to which reference is made. Past performance is not indicative of future results. Potential for Profits is accompanied by possibility of loss. Some performance information presented is the result of back-tested performance. Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the discussed strategy during a specific period. Back-tested performance results have certain limitations. Such results do not represent the impact of material economic and market factors might have on an investment advisor s decision making process if the advisor were actually managing client money. Back-testing performance also differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight. Dorsey, Wright & Associates believes the data used in the testing to be from credible, reliable sources, however; Dorsey, Wright & Associates, LLC (collectively with its affiliates and parent company, DWA ) makes no representation or warranties of any kind as to the accuracy of such data. Options involve risk and are not suitable for all investors. When participating in a covered call strategy, the investor is at risk of having to sell the stock if the stock s price rises above the strike price. Remember, in exchange for receiving the premium of having sold the calls, the investor is obligated to sell the stock if the option is exercised. The use of options may include certain types of leverage, and some options transactions could result in losses greater than the amount of the original investment in that position. When investing in options, investors run the risk of losing their entire investment in a relatively short period of time. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies 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. Unless otherwise stated, the returns of the strategies do not include dividends for stocks or ETFs but do account for distributions in mutual funds. Returns of the strategies do not include any transaction costs. Investors should have long-term financial objectives. The information contained herein has been prepared without regard to any particular investor s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable ( information providers ). However, such information has not been verified by DWA or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund ("ETF") prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETF's may result in the layering of fees as ETF's impose their own advisory and other fees. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website ( 32

33 DISCLAIMER NASDAQ and NASDAQ OMX are registered trademarks of The NASDAQ OMX Group, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither The NASDAQ OMX Group, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding NASDAQ-listed companies or NASDAQ proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED The NASDAQ OMX Group, Inc. All Rights Reserved. 33

34 Contact US Dave Gedeon Vice President Global Head of Research & Development Nasdaq Global Indexes +1 (301) To subscribe to Nasdaq research and communications, visit 34