Combination of Momentum and Energy Exposure Dorsey Wright™ Technical Leaders Energy Index

Combination of Momentum and Energy Exposure Dorsey Wright™ Technical Leaders Energy Index

The Dorsey Wright™ Tech Leaders Industry Index Suite was launched just over nine years ago in March 2013. Each momentum-driven index in the suite follows the same rules-based methodology that is designed to measure the performance of leaders. of high relative strength in nine broad sectors of the US stock market as defined by Dorsey Wright’s proprietary sector classification system, including Basic Materials, Consumer Cyclicals, Consumer Staples, Energy, Financials, health, industry, technology and public services. The Dorsey Wright Technical Leaders Sector Index methodology combines concentrated sector exposure with a momentum overlay using only one objective input, price, to measure relative strength. As an investment factor, momentum has proven to be a strong factor and, when used as a selection criteria, is capable of outperforming over the long term. So far in 2022, we have seen sustained leadership of the US stock market by Energy despite heightened volatility fueled by the war between Russia and Ukraine, rising rates and record numbers of inflation. As a result, the Dorsey Wright Energy Technical Leaders Index™ (DWEN™) has significantly outperformed the broader US stock market, while also outperforming energy sector benchmarks thanks to its concentration of components of high relative strength.

Index Methodology

The starting universe for the Dorsey Wright Energy Technical Leaders Index begins with the top 2,000 stocks from the Nasdaq US Benchmark Index that are also ranked within the energy sector, based on DWA’s proprietary industry ranking system. A liquidity screen is then applied, requiring the stock to have a three-month average daily dollar trading volume of $1 million. Stocks are then ranked by their respective momentum scores using the point-and-figure relative strength methodology. Each security’s momentum score is based on medium- and long-term price movements relative to a representative market benchmark. For a deeper dive into the relative strength of points and figures, see the white paper Relative Strength Points and Figure Signals published by Dorsey Wright.

Once ranked, the top 30 stocks (at least) are selected for inclusion as they are considered the strongest in relative terms. The index operates on a quarterly reconstitution and rebalancing schedule, allowing it to adapt to changing leadership trends throughout the calendar year. Index weights are determined so that stocks with higher relative strength scores receive higher weights. There are no sector or sub-sector restrictions in the Dorsey Wright Energy Technical Leaders Index, allowing for a focused energy play with a momentum bias.

Index Composition

As of the most recent quarterly reconstitution and rebalancing, the Dorsey Wright Energy Technical Leaders Index consists of 40 names with an overweight in the Oil sub-sector: Crude Producers of 61%. In fact, eight of the top ten weights come from the Oil sub-sector: crude oil producers including Ovintiv Inc, Range Resources and Matador Resources. On average, the top ten weighted stocks gained 50.5% during the first quarter of the year, which speaks to the unprecedented level of strength coming from the top-ranked momentum stocks within the energy sector.

Compared to a traditional market capitalization-weighted broad energy benchmark such as the Nasdaq US Energy Benchmark Index™, the Dorsey Wright Energy Technical Leaders Index currently provides more exposure to oil subsectors: crude oil producers, equipment and oil and coal services (according to ICB). ). Unlike the Nasdaq US Energy Benchmark Index, DWEN does not have any exposure to alternative fuels or renewable energy equipment, which has been a weaker area of ​​the energy market lately due to factors such as implementation costs and infrastructure limitations. One of the benefits of combining a momentum overlay with a quarterly rebuilding and rebalancing program is that the Index can more quickly adapt to changes in sub-sector leadership rather than operating on an annual or semi-annual evaluation schedule. It is the process of rotating into areas of strength like Oil: Crude Producers and away from areas of weakness like Renewables that drives the long-term success of such relative strength-based strategies.

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Index Performance

Since Pfizer and BioNTech announced a 90% effective vaccine against COVID-19, the Dorsey Wright Energy Technical Leaders Index has gained an impressive 244.5%, outperforming the US energy benchmark. Nasdaq and the S&P 500 index by 67.3% and 215.4%. respectively (11/6/2020 – 3/31/2022). While reopening/reflation trading is not the only driving factor behind energy’s recent run, it has certainly played a role. Furthermore, we have seen a stellar performance so far this year, with DWEN posting a 40.0% return in the first quarter of 2022, while the US energy benchmark Nasdaq has gained a 37, two%. The S&P 500 index has lost -4.6% over the same period.

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Although the price movement of the energy sector in general has been particularly bullish in the last 18 months, we have seen periods of extreme weakness in the last decade, such as the oil market oversupply crisis of 2014-2015, the general bear market in equities in Q4’18, and the coronavirus-induced lockdowns from March 2020, which briefly pushed oil prices into negative territory for the first time in history. These weaker periods resulted in amplified drawdowns in DWEN’s concentrated portfolio compared to the US benchmark Nasdaq energy index, causing Dorsey Wright’s Energy Technical Leaders Index to lag over the long term. . Since its launch on March 28, 2013, DWEN has lost -14.27% based on price return, while the US Nasdaq energy benchmark has returned -2, 71%; meanwhile, the S&P 500 index has gained more than +188%. As a reminder, relative strength thrives on performance dispersion and requires sustained market leadership, which is what we have seen over the past 18 months and is reflected in recent DWEN performance. While we have no way of knowing if the energy leading trend will hold, we do know that the Dorsey Wright Energy Technical Leaders Index will continue to adapt and adjust its exposure accordingly in an objective, rules-based manner using relative strength. .

Summary

The Dorsey Wright Energy Technical Leaders Index tracks the performances of high relative strength leaders in the broader energy space. During the first quarter of 2022, the Index gained +40% in total return terms, outperforming the SPX by over +44%, demonstrating the power of dispersion and superior relative strength within the energy space.

The Invesco DWA Energy Momentum ETF (Nasdaq: PXI) tracks the Dorsey Wright Energy Technical Leaders Index.

Fuentes: FactSet, Bloomberg, Nasdaq Global Indexes.