DWAS: Excessively Risky SMID Strategy With Bleak Returns

seekingalpha08-28

DWAS offers exposure to small- and mid-cap names with convincing momentum characteristics.Yet, its strategy of capitalizing on SMID stocks that were on a tear did not translate into meaningful and ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nDWAS: Excessively Risky SMID Strategy With Bleak Returns\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-28 01:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717411-dwas-excessively-risky-smid-strategy-with-bleak-returns><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>DWAS offers exposure to small- and mid-cap names with convincing momentum characteristics.Yet, its strategy of capitalizing on SMID stocks that were on a tear did not translate into meaningful and ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717411-dwas-excessively-risky-smid-strategy-with-bleak-returns\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SPY","symbol_name":"标普500ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4717411-dwas-excessively-risky-smid-strategy-with-bleak-returns","article_id":"2462111925","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/157430511/image_157430511.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2462111925","pubTimestamp":1724779805,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"DWAS' website provides a succinct overview of the key aspects of its strategy. It is explained that the Dorsey Wright SmallCap Technical Leaders Index is its basis. Its reconstitution as well as rebalancing have a quarterly schedule. Regarding the methodology, it is said that: The Index includes securities pursuant to a Dorsey, Wright & Associates, LLC proprietary selection methodology that is designed to identify companies that demonstrate powerful relative strength characteristics based on that company’s market performance. Approximately 200 companies are selected for inclusion in the Index from the NASDAQ US Benchmark Index. The prospectus gives a bit more detail on that. For instance, it clarifies that the selection process includes the calculation of the momentum score. The momentum score for each security included in the Underlying Index is based on intermediate and long-term upward price movements of the security as compared to a representative benchmark index.  DWAS returns: un","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SPY":"标普500ETF","IJR":"标普小型股600指数ETF-iShares","FDN":"First Trust Dow Jones Internet I","BK4559":"巴菲特持仓","SDS":"两倍做空标普500ETF","BK4588":"碎股","BK4550":"红杉资本持仓","BK4504":"桥水持仓","DWAS":"Invesco DWA SmallCap Momentum ETF","VOO":"Vanguard标普500ETF",".SPX":"S&P 500 Index","OEX":"标普100","BK4581":"高盛持仓","UPRO":"三倍做多标普500ETF","BK4585":"ETF&股票定投概念","BK4011":"建筑材料","SH":"标普500反向ETF","IVV":"标普500指数ETF","SMID":"SMITH-MIDLAND CORP","SSO":"两倍做多标普500ETF","SPXU":"三倍做空标普500ETF","OEF":"标普100指数ETF-iShares","BK4534":"瑞士信贷持仓"},"translate_title":"DWAS：SMID策略风险过大，回报惨淡","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SMID":1,"IJR":1,"DWAS":1,"VOO":0.9,"FDN":0.9,"SPY":0.69,"OEF":0.6,".SPX":0.6,"UPRO":0.6,"SSO":0.6,"SPXU":0.6,"SH":0.6,"SDS":0.6,"OEX":0.6,"IVV":0.6,"ESmain":0.6},"content_text":"DWAS offers exposure to small- and mid-cap names with convincing momentum characteristics.Yet, its strategy of capitalizing on SMID stocks that were on a tear did not translate into meaningful and consistent outperformance in the past.Its historical risk-adjusted returns are much weaker than those of IVV and IJR, owing to its volatility, which, in turn, is likely influenced by soft quality.In the current version, DWAS remains light in quality stocks. There is a bright spot on the growth front, but with a few nuances.I believe there are enough arguments to maintain the Hold rating.   georgeclerkThe Invesco Dorsey Wright SmallCap Momentum ETF (NASDAQ:DWAS) offers a quality-light take on racy stocks from the small- and mid-cap echelon. Despite looking promising at first blush, I believe this is a rather precarious strategy that does not yield returns that would compensate for its excessive risks. In my previous note presented in February of this year, I explained that DWAS has two major issues, namely soft quality and fairly questionable performance. There are two factors that influenced my decision to write a follow-up on the name today. First, the ETF has materially underperformed the S&P 500. Second, its portfolio has been deeply recalibrated in the wake of two reconstitutions, and it is my pleasure to provide my readers with a review that is supposed to reinforce the point that, despite the portfolio being reshuffled frequently, the ETF's quality factor exposure does not become much larger (enough to qualify for the Buy list) and that it mostly cannot capture enough market upside. But before discussing all these details, I believe it is worth recapping the essentials of its strategy. How does DWAS select potent small-caps stocks? DWAS' website provides a succinct overview of the key aspects of its strategy. It is explained that the Dorsey Wright SmallCap Technical Leaders Index is its basis. Its reconstitution as well as rebalancing have a quarterly schedule. Regarding the methodology, it is said that: The Index includes securities pursuant to a Dorsey, Wright & Associates, LLC proprietary selection methodology that is designed to identify companies that demonstrate powerful relative strength characteristics based on that company’s market performance. Approximately 200 companies are selected for inclusion in the Index from the NASDAQ US Benchmark Index. The prospectus gives a bit more detail on that. For instance, it clarifies that the selection process includes the calculation of the momentum score. The momentum score for each security included in the Underlying Index is based on intermediate and long-term upward price movements of the security as compared to a representative benchmark index.  DWAS returns: underperformance persists Is DWAS capable of identifying winners? There is no denying that it is, but the bigger problem is that it is unable to adequately benefit from this ability. A good example here is that the weighted-average YTD price return of its portfolio is almost 68.8%, as per my calculations, with the key contributors being the health care sector in general and biotechnology companies in particular (the sector's median YTD price return is 55.4%). But how much has the fund itself returned over that period? Approximately 10.6%, as of writing this article. The iShares Core S&P 500 ETF (IVV) has returned about 18%. Also, since the previous note, DWAS has significantly underperformed the S&P 500 index.   Seeking AlphaLonger-term returns offer little in defense of its strategy, as almost nothing has changed since my February note. To illustrate that, I have compiled the following data:    Metric DWAS IVV IJR   Start Balance $10,000 $10,000 $10,000   End Balance $39,521 $50,077 $38,605   CAGR 12.13% 14.37% 11.91%   Standard Deviation 21.19% 14.36% 19.20%   Best Year 50.12% 32.29% 41.32%   Worst Year -18.51% -18.16% -16.19%   Maximum Drawdown -31.25% -23.93% -36.12%   Sharpe Ratio 0.59 0.92 0.62   Sortino Ratio 0.88 1.46 0.95   Upside Capture 105.78% 100.22% 99.47%   Downside Capture 118.71% 97.31% 110.37%   Click to enlarge Data from Portfolio Visualizer. The period is August 2012 - July 2024 It is clearly seen that while the task of matching the pace of the market (which I proxy with IVV on a regular basis) was failed by DWAS, it did outperform the iShares Core S&P Small-Cap ETF (IJR), but only by a few bps. I see two problems with this.  First, this is not an achievement to praise for an ETF that has a massive turnover of 181% as it removes stocks it considers losers and adds winners quarterly, mirroring the reconstitution process of the underlying index. Meanwhile, IJR's turnover was just 25% in the most recent fiscal year. Second, as DWAS is highly volatile, which is not a surprise for a momentum-centered vehicle, its risk-adjusted returns (namely Sortino and Sharpe ratios in the table above) are much weaker compared to those of IJR.  DWAS factor mix: permanent quality issues Compromises on the quality front are not what I am ready for. I suppose most of my readers take this factor seriously as well. And DWAS does not deliver on that front. Since February 22, about 60.5% of DWAS' holdings have been ousted as the underlying index was reconstituted in March and June. Something has changed in terms of sector allocations, as illustrated by the table below. For example, utilities are now not represented, while the fund's allocation to industrials has become even larger.   Created by the author using data from the ETFHowever, little has changed regarding its quality factor exposure, which is a perennial concern. To corroborate, as of August 26, out of 200 companies in its portfolio, 53 (accounting for 23.8% of the net assets; weights as of August 23) were unprofitable. This is not necessarily an issue, as losses can be the consequence of heavy research & development expenses that are required to secure robust growth rates, and, hence, there should be an improvement in quality plus the potential for capital appreciation in the future. This is partly evident from the fact that EBITDA margins are rather compressed or negative, with the weighted average at just 10.1%, which implies it was operating expenses (including, but, of course, not limited to R&D) and not interest, taxes, or depreciation & amortization that have had the most significant impact on the bottom line. Just to contextualize, the WA EBITDA margin of the IVV portfolio is approximately 32%. Truly, DWAS' portfolio has rather strong weighted-average growth rates, as per my calculations.    Portfolio as of EPS Fwd Revenue Fwd   February 9.3% 11.9%   August 18.7% 15.84%   Click to enlarge Calculated using data from Seeking Alpha and the ETF However, I see no reason why quality should be sacrificed to gain exposure to this level of growth. It is true that the revenue growth rate is higher than that of the S&P 500 ETF; nevertheless, their EPS growth rates are almost on par.    ETF EPS Fwd Revenue Fwd   IVV 18.32% 12.26%   Click to enlarge Calculated using data from Seeking Alpha and the ETF And there is another issue that is not immediately visible. The fact is, EPS growth rates are unavailable for 30% of the DWAS portfolio (the top reason is that these companies are currently loss-making or are forecast to remain loss-making). In IVV, such stocks have less than 5% weight. This affects the accuracy of the results. Next, their quality characteristics are simply incompatible. DWAS has just 50.2% allocation to companies with a B- Quant Profitability rating or higher, vs. almost 95% in the case of IVV. There is also a massive difference in the capital efficiency metrics.    ETF Adjusted ROE ROA   IVV 20.07% 14.29%   DWAS 14.13% 1.7%   Click to enlarge Calculated using data from Seeking Alpha and the ETF Also, some attention should be paid to value. Its weighted-average earnings yield is not very informative, as negative figures render it unusable. But with due adjustments made (negative figures replaced with zero), we arrive at an EY of 4%, which is not particularly indicative of a value tilt by SMID standards. And it is higher than that of IVV by only 30 bps. Also, only 27.9% of its net assets are allocated to stocks with a B- Quant Valuation grade or higher. Regarding the size factor, DWAS' weighted-average market cap has risen since the previous note to $3.74 billion (as of August 26) from $2.95 billion. Small- and micro-caps account for about 32% of the portfolio. Regarding volatility and momentum characteristics, I should say that it does offer sizable exposure to the latter factor.    Portfolio as of Quant Momentum B- or higher 24M Beta 60M Beta   February 78.47% 1.21 1.28   August 88.25% 1.20 1.29   Click to enlarge Calculated using data from Seeking Alpha and the ETF The flip side is high beta, which remains solidly above 1, in line with the figures seen in February. Conclusion In sum, the riskiness of DWAS' strategy did not translate into significant outperformance in the past. I see no argument for how this may change in the future. One of the reasons here is that the quality characteristics of its portfolio leave a lot to be desired, and, in my view, this is an issue that cannot be fixed with a portfolio reconstitution as it is embedded into the selection universe.  Overall, I acknowledge that investors might play the volatility game with this vehicle and that it is sometimes rather capable, as since its inception in 2012, it has had eight months with a return in excess of 10%, with the most recent one being December 2023 (11.5%). For context, IVV had only two such months, with the due remark here being that those came in April and November of the highly volatile, pandemic-torn 2020. IJR was closer to this result, with seven such months in the books. However, DWAS is anything but an option for long-term investors, as volatility will be eating into risk-adjusted returns. The burdensome expense ratio of 60 bps is another problem. The Hold rating is thus maintained.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462111925"}