What is DWAS? (Pros, Cons, and Strategies)
In a volatile market environment, investing in smaller companies displaying strong momentum can be an intriguing strategy. This is where the Invesco Dorsey Wright SmallCap Momentum ETF, widely known by its ticker DWAS, comes into play. By focusing on small-cap stocks that exhibit high momentum, DWAS provides a unique investment opportunity. This blog post will delve into what DWAS is, its advantages and disadvantages, and various strategies to consider.
What is DWAS?
DWAS is an exchange-traded fund (ETF) that targets small-cap stocks demonstrating high momentum. Created by Invesco, DWAS is designed to provide investors with exposure to small companies with strong price performance.
DWAS leverages the Dorsey Wright Relative Strength Index, which focuses on identifying stocks that are outperforming relative to others. This makes DWAS an excellent option for investors looking to capitalize on the momentum strategy within the small-cap segment of the U.S. stock market.
Key Features of DWAS
- Small-cap Focus: DWAS invests in small-cap stocks, typically with market capitalizations between $300 million and $2 billion.
- Momentum Strategy: Stocks are selected based on their relative strength and price momentum, emphasizing those that have been outperforming their peers.
- Quarterly Rebalancing: The index rebalances quarterly to ensure the portfolio remains focused on high-momentum stocks.
After identifying the stocks showing the highest relative strength, the fund equally weights each constituent to ensure broad exposure across the top-performing small-cap companies.
DWAS Composition
DWAS is composed of small-cap stocks from various sectors, such as consumer discretionary, healthcare, industrials, and information technology. Companies within this ETF frequently change due to the momentum-based strategy and quarterly rebalancing.
Examples of companies in the DWAS portfolio can include lesser-known but rapidly growing firms in niche markets, providing diversification away from large-cap, more established names.
Pros of DWAS
High Growth Potential
Small-cap stocks historically have had higher growth potential compared to large-cap stocks. By focusing on small-cap companies displaying strong momentum, DWAS aims to capture significant price appreciation. This makes it an attractive option for investors seeking growth opportunities in less well-known but rapidly growing companies.
Momentum Strategy Benefits
The momentum strategy utilized by DWAS has been shown to offer superior returns over the long term. By investing in small-cap stocks that have already demonstrated upward price movement, DWAS aims to continue riding these trends, potentially leading to enhanced portfolio performance.
Diversification
DWAS provides exposure to a diverse range of small-cap stocks across various sectors. This diversification can help spread risk and reduce the impact of poor performance in any single sector or stock.
Cons of DWAS
High Volatility
Small-cap stocks are inherently more volatile than their large-cap counterparts. This means that while there may be higher growth potential, the possibility of significant price swings is also greater. Investors must be prepared for increased volatility when investing in DWAS.
Elevated Expense Ratio
DWAS has a relatively higher expense ratio compared to broader market ETFs such as SCHD. The expense ratio takes into account the costs associated with managing the ETF, including rebalancing and research. The current expense ratio for DWAS is around 0.60%, which can impact long-term returns.
Short-term Focus
The momentum strategy tends to focus on short-term price movements. While this can lead to enhanced performance in rising markets, it may also result in higher turnover rates, which can trigger capital gains taxes and reduce overall tax efficiency for taxable accounts.
DWAS Investment Strategies
DWAS can be a valuable addition to a well-diversified portfolio, particularly for investors who are willing to take on higher risk for the possibility of higher returns. Here are some strategies to consider:
Long-term Growth Strategy
Given the high growth potential of small-cap stocks, a long-term investment horizon can help investors ride out the volatility and capitalize on the growth of small, dynamic companies. Holding DWAS for an extended period allows for the compounding of returns and can potentially lead to significant gains.
Tactical Allocation
Investors might choose to use DWAS as part of a tactical allocation strategy, increasing exposure to small-cap momentum stocks during favorable market conditions and reducing it during periods of uncertainty. This approach requires a more hands-on investment style but can help manage risk and enhance returns.
Complementary Investment
DWAS can serve as a complement to other investments, such as large-cap ETFs or dividend-focused funds like SCHD. By blending DWAS with more conservative investments, investors can balance volatility and generate a more stable overall portfolio.
Rebalancing and Monitoring
Due to the quarterly rebalancing of DWAS, investors should regularly review their allocation to ensure it aligns with their investment goals and risk tolerance. Monitoring the performance and making adjustments based on market conditions can help optimize returns.
Conclusion
DWAS offers a unique investment opportunity in the small-cap universe by leveraging a momentum-based approach. While it comes with higher volatility and expenses, the potential for significant growth makes it an attractive option for long-term investors willing to embrace higher risk. By carefully integrating DWAS into a diversified portfolio and employing thoughtful investment strategies, investors can potentially enhance their overall returns and achieve their financial goals.