Friday, March 02, 2007

This Is A Great ETF

Powershares has released yet one more ETF, PDP, and this one tracks an index of 100 stocks that are selected based on their relative strength. The ETF tracks the Dorsey Wright Technical Leaders Index. Now I don't know who Dorsey Wright is but the article I read on Seeking Alpha pointed me to the PDP prospectus and that explained how the index is formed.

Briefly the technical leaders index is constituted by ranking the 3000 largest stocks using a proprietary relative strength methodology. This is not the RSI - what they are doing is ranking the stock's strength relative to a benchmark index (probably the SPX) and the 100 strongest stocks are then selected for inclusion in the index.

Powershares has captured this index in this new ETF and why I am so excited about it is that this ETF should track the big cap market as represented by the SPY and DIA nearly perfectly. in other words when the market goes up the PDP should go up and when the market goes down the PDP should go down.

I read about this on Seeking Alpha and the guy who wrote the article had some real snarky comments about the timing of this ETF as far as it hitting the market right now. The problem with those comments is this - it came on the market Thursday and look at this -

It tracked the market perfectly on both days that its been active so far.

So I say put the snark away this is a trader's dream - when you buy the ETFs that replicate the index such as SPY, DIA, or the Q's all you get is beta. With PDP you should get both beta and alpha.

And given that it is a Powershares product can an inverse PDP be far behind?

Here's the prospectus.

And as usual this is not an invitation to invest in the stock market - as seen this week that can be a capital destroying activity. Buy instant coffee instead.