DWAS: High-Risk/High-Reward Small-Cap ETF

seekingalpha06-03

Invesco Dorsey Wright SmallCap Momentum ETF holds 199 small caps selected and weighted based on a proprietary momentum score.The DWAS ETF is overweight in industrials and healthcare, but well-...

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It has 199 holdings, a 12-month distribution yield of 1.34% and an expense ratio of 0.60%. As described in the prospectus by Invesco, the underlying index “is composed of approximately 200 securities from an eligible universe of approximately 2,000 securities ranked 1,001 to 3,000 by market capitalization within the NASDAQ US Benchmark Index™.” Eligible stocks are ranked based on a momentum score calculated from “intermediate and long-term upward price movements of the security as compared to a representative benchmark index.” About 200 stocks are selected in the index and weighted based on their momentum scores. The details about the methodology and momentum score calculation are not disclosed. The fund’s turnover rate in the most recent fiscal year was 181%. In accordance with the eligible stock universe definition, this article will use as a benchmark the Russell 2000 index, represented by iShares Russell 2000 ETF (IWM). The DWAS portfolio The portfolio is almost exclusively invested in U.S. companies (98% of asset value). The heaviest sectors are industrials (27.3%) and healthcare (25.4%), followed by financials (13%) and consumer discretionary (12.2%). Other sectors weigh no more than 7%. Compared to the benchmark, DWAS overweights the top 2 sectors listed above and underweights mostly technology, consumer staples and real estate. It ignores utilities.   DWAS sector breakdown (Chart: author; data: Invesco, iShares) The fund is well-diversified. The top 10 holdings, listed in the next table with fundamental ratios, represent 14.9% of asset value. All positions are below 2%, so risks related to individual companies are low.   Ticker Name Weight% EPS growth %TTM P/E TTM P/E fwd Yield   MOD Modine Manufacturing Co. 1.76 4.78 33.30 27.39 0   TDW Tidewater Inc. 1.68 2879.07 41.18 19.85 0   STRL Sterling Infrastructure, Inc. 1.60 63.17 25.53 23.36 0   SLNO Soleno Therapeutics, Inc. 1.52 12.45 N/A N/A 0   ANF Abercrombie & Fitch Co. 1.50 1061.73 21.50 18.82 0   TRNS Transcat, Inc. 1.49 13.80 80.22 47.54 0   SPXC SPX Technologies, Inc. 1.44 238.76 42.08 26.10 0   LMB Limbach Holdings, Inc. 1.36 106.30 26.52 26.24 0   ADMA ADMA Biologics, Inc. 1.28 91.39 N/A 27.09 0   POWL Powell Industries, Inc. 1.27 268.47 21.36 19.56 0.59   Click to enlarge Fundamentals DWAS is significantly superior to the benchmark regarding earnings growth and cash flow growth rates, as reported in the next table. It is also cheaper based on the price/earnings ratio, which is quite unusual for a momentum fund. Other valuation ratios are higher, though.     DWAS IWM   P/E TTM 12.38 15.36   Price/Book 3 1.89   Price/Sales 1.39 1.22   Price/Cash Flow 10.51 8.96   Earnings growth 25.96% 19.96%   Cash flow growth % 31.03% 11.68%   Click to enlarge Data source: Fidelity. In my ETF reviews, risky stocks are companies with at least two red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are unreliable. With this assumption, risky stocks weigh 40% of asset value, which is a very bad point. Additionally, according to my calculation of aggregate quality metrics (reported in the next table), the return on assets is negative and inferior to the benchmark. The Piotroski F-score is slightly higher, but below the threshold I consider as \"good\" (which is 6). These numbers are typical of a high-risk portfolio and below-par quality.     DWAS IWM   Piotroski F-score 5.32 4.72   ROA % TTM -4.81 -0.21   Click to enlarge Performance Since 8/1/2012, DWAS has outperformed the Russell 2000 by 1.8% in annualized return, as reported below. Risk measured in maximum drawdown and standard deviation of monthly returns (“volatility”) is higher than the benchmark.     Total Return Annual.Return Drawdown Sharpe ratio Volatility   DWAS 279.71% 11.93% -46.17% 0.56 21.21%   IWM 214.24% 10.15% -41.13% 0.51 19.33%   Click to enlarge DWAS beats IWM by 2.9% over the last 12 months:   DWAS vs IWM, 12-month return (Seeking Alpha) DWAS vs. competitors DWAS is classified in the “Small Growth” category by Fidelity and Morningstar. The next table compares characteristics of DWAS and five small-cap ETFs implementing momentum or growth strategies:  Invesco S&P SmallCap Momentum ETF (XSMO) iShares S&P Small-Cap 600 Growth ETF (IJT) Vanguard Russell 2000 Growth ETF (VTWG) iShares Morningstar Small-Cap Growth ETF (ISCG) First Trust Small Cap Growth AlphaDEX Fund (FYC).      DWAS XSMO IJT VTWG ISCG FYC   Inception 7/19/2012 3/3/2005 7/24/2000 9/20/2010 6/28/2004 4/19/2011   Expense Ratio 0.60% 0.39% 0.18% 0.15% 0.06% 0.70%   AUM $942.78M $686.41M $5.94B $1.11B $552.98M $273.78M   Avg Daily Volume $4.19M $8.20M $12.61M $4.93M $1.81M $797.67K   Holdings 199 118 354 1084 1003 264   Top 10 14.90% 23.29% 11.73% 10.14% 5.99% 8.88%   Turnover 181.00% 125.00% 54.00% 32.00% 52.00% 140.00%   Click to enlarge DWAS has the highest turnover on this list, and its fee is the second most expensive. The next chart plots total returns since 7/23/2012. DWAS is the second-best performer, behind XSMO and shortly ahead of IJT.   DWAS vs competitors, since 7/23/2012 (Seeking Alpha) Over the last 12 months, DWAS is lagging XSMO by over 16% and is almost a tie with IJT again:   DWAS vs competitors, 12-month return (Seeking Alpha) Takeaway  Invesco Dorsey Wright SmallCap Momentum ETF holds 199 small caps selected and weighted based on a proprietary momentum score. DWAS is overweight in industrials and healthcare, but well-diversified across holdings. Based on quality metrics and price history, DWAS has a high-risk/high-reward profile. It has outperformed the Russell 2000 index and small-cap growth ETFs since inception. 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