Over the past three years, PowerShares Dynamic Large Cap Value (NYSEArca:PWV – News) has generated a track record that may not look that great on an absolute basis but is pretty impressive on a relative basis. Through April 24, 2009, PWV has returned negative 6.21% over the past three years. While negative returns are rarely something to crow about, when you compare that to the three-year return of the S&P-500-tracking SPDR (NYSEArca:SPY – News), negative 11.10%, the relative performance is impressive. The differential was good enough to earn this active ETF a 5-star rating against its ETF and open-end mutual fund competition.
So, how did PWV manage to generate 489 basis points of relative outperformance against its large-value benchmark? Structurally, the PWV is a quantitative-active fund following PowerShares’ Intellidex indexing strategy. First, the index sorts the investable universe into its market-cap style–in this case large cap–and then further sorts the list down to a value component. From that series of sorts, the fund picks and weights and invests in the 50 best stocks according to its multifactor model. The factors essentially boil down to three categories: valuation, growth, and market-price momentum. Every quarter, the index mechanically re-sorts the list by these sorts and factors and rebalances as necessary.
So, that is how the fund works, but that doesn’t necessarily explain how the factor screening managed to create such strong relative performance. To do that, we need to conduct an attribution analysis. This kind of analysis seeks to pull apart a fund’s performance relative to its benchmark in order to dissect the true source of a fund’s returns. There are a hundred ways to slice and dice a fund’s performance, but the most common are to look at how various weightings affected the returns in terms of sector, industry, and style categories. Additionally, we can take a look at how the fund performs in these separate categories to get a sense of its stock-picking ability.
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