DWEQ: 2nd Quarter 2021 Portfolio Review
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/dweq.
Nasdaq Dorsey Wright has been a trusted partner for advisors since the 1980’s when the original team faxed Point and Figure charts from a small office in Richmond, Virginia. In the 90’s we began to implement our research into managed portfolios, later we introduced mutual funds, structured products and ETF’s. All of our strategies are based on a simple idea: buy the stocks our analysis identifies as winners and let them run. We systematically manage all of our portfolios to a set of rules that allows us to be objective and remove the emotion. It does not matter how a particular analysts feels about a stock (positive or negative), we follow our strict buy and sell process. This has, in our opinion been a hallmark of our success across a variety of asset classes.
For the AdvisorShares Dorsey Wright Alpha Equal weight ETF (Ticker: DWEQ) we continue to deploy investment ideas that have shown value over time. The first idea is that sectors showing strong momentum will often outpace the broad market and the sectors that show less favorable momentum. This is achieved by using our systematic analysis to overweight to what we believe are strong companies to capture upward momentum, as well as removing or reducing allocations to trouble areas. Prime examples are reducing or removing energy exposure during the oil sell off of 2015 or overweighting technology over the past decade. The second idea is that being overly diversified dilutes momentum returns by forcing the portfolio to own names that are not as strong. This is implemented by reducing the total number of portfolio holdings to a manageable number.
Combining both of these ideas gives us a portfolio of names that are equally weighted in the three sectors that are showing the strongest momentum. The roughly 50 names in the portfolio are equally weighted and are rebalanced every time the portfolio makes a change. This pushes the portfolio to hold what we have identified as the top names in each sector.
Portfolio & Holdings
The performance of equity markets has been very choppy this year. The returns of the broad benchmarks have been very strong, but under the surface we have seen quite a bit of rotation. The first quarter was characterized by a large laggard rally where areas of the market that had not performed well for a long time suddenly did very well. This was driven largely by hopes of a strong recovery as vaccination rates increased and COVID became less of a threat to the economy. The second quarter was characterized by a pullback in these trends. That has led to choppy performance from most factor strategies – momentum included. We are seeing this both domestically and internationally. This potential transition period is global and will take some time to sort itself out.
Part of the reason why markets have been so choppy is it is so difficult to interpret data right now. We had artificially low numbers a year ago when the economy was shut down due to the pandemic. As things return to normal, economic activity is snapping back. What everyone is trying to determine is what these large recovery numbers mean long-term. The Consumer Price Index, for example, was up 5% year over year at the end of May. This would normally be a major indication that economy was running very hot, and inflation is an issue. The Federal Reserve believes that the current inflation level is “transitory.” In their June meeting, the Fed indicated rate increases wouldn’t be coming until 2023, which was farther out than many people thought (especially considering the recent CPI numbers). That caused a dramatic decline in rates as well as a flattening of the yield curve, which was a huge reason bonds were able to reverse the poor returns from the first three months of the year and finish the quarter in positive territory.
All the uncertainty and choppiness has resulted in our strategies having higher than normal turnover so far this year. It appears as if this will continue throughout the summer as well. Our methodology is designed to look for strength, and right now that strength hasn’t been sustainable. These periods of choppy action eventually resolve themselves one way or another and turn in to trending markets. Our strategies are designed to find and capitalize on those trends.
|Ticker||Security Description||Portfolio Weight %|
|ARES||ARES MANAGEMENT CORP – A||2.91%|
|APO||APOLLO GLOBAL MANAGEMENT INC||2.81%|
|TRGP||TARGA RESOURCES CORP||2.80%|
|KKR||KKR & CO INC||2.70%|
|CLR||CONTINENTAL RESOURCES INC/OK||2.69%|
|BX||BLACKSTONE GROUP INC/THE||2.68%|
|TT||TRANE TECHNOLOGIES PLC||2.58%|
|AOS||SMITH (A.O.) CORP||2.56%|
|WMS||ADVANCED DRAINAGE SYSTEMS IN||2.56%|
As of 06.30.2021.
John G. Lewis
Nasdaq Dorsey Wright
AdvisorShares Dorsey Wright Alpha Equal Weight ETF (DWEQ) Portfolio Strategist
Past Manager Commentary