With US small cap growth now taking the top ranking on the Asset Class Group Scores page, we review the recent movement of the space through the Invesco DWA SmallCap Momentum ETF (DWAS) representative.
Market action over the past few weeks has seen broader participation to the upside from many segments of the domestic equity market, especially those that lagged the large-cap growth-oriented market leadership throughout the first three quarters of 2020. Small cap equity names have been one such area of improvement, as we can see through the Asset Class Group Scores (ACGS) page on the NDW research platform. As a reminder, this page takes all the ETFs and mutual funds tracked on the NDW system and classifies them into at least one of 135 different groups. Within each of these groups, we then take the fund scores of each fund and average them together to get a score for the group as a whole, following the same hierarchy associated with the individual scoring system that ranges from 0 (worst) to 6 (best). Each of the 135 groups is then ranked by their average score to pinpoint market leadership using the absolute and relative strength characteristics employed by the fund score methodology.
The recent market movement has led the US small cap growth group into the top position out of all 135 groups on the ACGS system with an average score of 4.89, marking its highest score reading in over two years. Other small cap groups have shown improvement as well, with the all small cap group also scoring at multi-year highs of 4.17 through Wednesday. The broader small cap group moved north of the 4.00 threshold for the first time in two years on November 9 and has shown further strength since that time. However, small cap growth has shown more rapid score improvement this year, as it moved above an average score of 4.00 in mid-June of this year and has also continued to march steadily higher. Although the broader small cap group has shown a greater score spike over the last few days, the small cap growth group has shown more consistent strength since moving off its score low in March.
The technical superiority of growth-oriented small cap names over the broad size representatives can also be seen on the individual fund level by comparing the Invesco DWA SmallCap Momentum ETF DWAS and the broader iShares Russell 2000 ETF IWM. DWAS seeks to track the Dorsey Wright Small Cap Technical Leaders Index, which looks to invest in the strongest 200 domestic small cap names. This fund comes in at a recent score posting of 5.46 through Wednesday, sitting over a full point higher than the still favorable 4.26 score of IWM. DWAS also shows a positive score direction of 3.15, indicative of its rapid technical improvement over the past few months. IWM is still a technically sound name with a favorable fund score, however, we have seen its one-year trailing total return of 12.74% fall short of the 27.59% total return of DWAS over the same time frame (through 11/18).
In order to dig deeper into this outperformance from the momentum representative, we have run a performance attribution analysis report on the underlying holdings of DWAS against those of IWM. This report shows that DWAS is significantly overweight healthcare at almost 37% of the portfolio, more than doubling the weighting of any other single sector. IWM also has a higher allocation to healthcare than any other single sector, but only arrives at a weighting of 20%. The momentum screen used by DWAS allowed for the overweighting of the healthcare sector, which accounted for about 21% of the 27% gain the fund has returned over the past year.
