Depending on your level of sophistication you may be anything from a long-term buy-and-hold investor, to a periodic rebalancer, momentum trader or active trader. What typically differentiates those investment styles is a combination of investment philosophy and reliance on technical analysis and momentum indicators. If you’re a passive (or relatively passive) investor who’s looking to take greater advantage of technical tools, you may want to consider investing in a fund with active management that leverages those tools such as a Dorsey Wright ETF.
Nasdaq Dorsey Wright is a highly regarded registered investment advisory firm that has been providing their clients with technical analysis research and tools for over 30 years. The philosophy of their technical analysis is actually relatively simple. In their own words:
Simply stated, Nasdaq Dorsey Wright focuses on the “price” of a security, because it is the ultimate determinant of supply and demand in the marketplace. When you cut through all the red tape on Wall Street, what moves equity prices is supply and demand. It is nothing more than ECONOMICS 101. We know why produce rotates in and out of the market each season; we don’t buy summer squash in the winter or winter squash in the summer. The same forces that move prices in the supermarket move the stock market. When all is said and done, if there are more buyers than sellers willing to sell, the price will move higher. If there are more sellers than buyers willing to buy, the price will move lower. Analyzing the price action of a security can yield important information as to what is winning the battle for that security — supply or demand.
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To execute on this philosophy, an index (or a Dorsey Wright ETF tracking that index) will rely on a technical indicator called Relative Strength.
What is Relative Strength?
The Dorsey Wright indexes based on Relative Strength tools use a peer-to-peer performance comparison to identify stocks with the highest momentum in their sectors, and a Dorsey Wright ETF will invest in those high-momentum companies using their own criteria, such as only investing in the top performers, or investing in all stocks in an index with portfolio weight determined by that performance.
While the Dorsey Wright analysis undergirds any Dorsey Wright ETF, it’s important to pay attention to how each fund manager chooses to use that analysis and how frequently the fund rebalances (normally this occurs on a quarterly basis).
Because, fundamentally, a Dorsey Wright ETF is invested in high-flying momentum stocks, you should anticipate a higher beta (the degree to which an investment outperforms its underlying index in bull markets and underperforms in bear markets) and a greater level of volatility than a typical index fund.
The Top Dorsey Wright ETF Pick for Healthcare
Just last month, Wall Street’s Best Digest subscribers received a Daily Alert featuring a Dorsey Wright ETF in the healthcare space. The Invesco DWA Healthcare Momentum ETF (PTH) is off slightly year-to-date (down just about 4.5%) due to choppiness among growth stocks but is up 45% and almost 250% in the last one- and five-year periods, respectively.
The fund has consistently been rated at four or five stars by Morningstar (the two highest ratings) over the last 10 years and companies comprising the fund are involved in developing Covid vaccines.
As you can see from the chart above, this Dorsey Wright ETF is off its February highs (along with most high-flyers in the market) but has consistently found support in the 146-148 range over the last few months. If that support level continues to hold and the fund can break above the 50-day line (has been a resistance level since March), this fund could be primed to resume the rapid growth it’s enjoyed for years.
Have you invested in Dorsey Wright indexed ETFs before?