Invesco Dorsey Wright SmallCap Momentum ETF (DWAS)

DWAS picks small-cap stocks based on how fast they are moving upward. The fund’s manager, Invesco, uses a system called relative strength analysis to identify companies whose shares have risen more than their peers recently. The idea is simple: stocks in motion tend to stay in motion. If a small-cap company’s shares have been climbing harder than the rest of the small-cap universe, the fund buys it. When its momentum fades, the fund sells it and moves on to the next climber.

How the momentum filter works

Here is the core of the strategy: the fund ranks all small-cap U.S. stocks by how much they have outperformed (or underperformed) their peers over a defined lookback period. The highest performers — the ones with the strongest relative strength — become the fund’s holdings. About 200 of them make the cut. Every three months, the fund recalculates the rankings, drops the momentum losers, and adds the new winners.

This is pure technical analysis. It ignores earnings, cash flow, or balance sheet quality. All that matters is price movement. The assumption is that stocks can develop trends — momentum that persists week to week and month to month — and that riding those trends produces returns. Some decades, momentum investing works spectacularly. Other decades, it whipsaws investors and lags badly. For small-cap stocks, the effect is often amplified because these companies are followed by fewer analysts and their prices can swing wildly on thin trading volume.

The small-cap angle

DWAS focuses on small-cap and micro-cap stocks, which are far more volatile than large-cap ones. A large-cap stock might swing five percent on a bad earnings miss; a small-cap stock might swing 20 percent on the same news, or on no news at all. This volatility is where momentum investors look for opportunity — bigger moves mean bigger profits if they pick the right direction. It is also where they find loss, if they pick the wrong one.

Small-cap stocks are concentrated in a few industries: software, healthcare, financials, and industrials tend to represent a large slice of the small-cap universe. DWAS, by virtue of selecting based purely on momentum, will tilt toward whichever sectors happen to be rising fastest at any moment. In a period when software is hot, the fund will become software-heavy. When momentum rotates to industrials, the fund will flip. This dynamic sector exposure is a feature of momentum-based funds — they go where the money is going — but it is also a risk. An unlucky rotation can mean the fund becomes overexposed to a sector just as it peaks.

Trading and costs

DWAS trades on the NASDAQ exchange, usually with modest volume and reasonable spreads, so it is accessible to most investors but lacks the liquidity of mega-cap ETFs. The fund’s expense ratio of 0.60 percent per year is moderate. However, momentum strategies often require frequent rebalancing — adding new positions, selling old ones — which can generate trading costs and tax consequences that aren’t fully captured in the headline expense ratio.

For individual investors, the main cost is behavioral risk. Momentum funds work best when investors buy them when they are doing well (momentum is rising) and stick with them through the inevitable periods when momentum fades and the fund underperforms. In practice, many investors buy near the peak of momentum and sell near the trough, compounding their losses with poor timing. If you buy DWAS, the expectation should be that it will swing wildly — both up and down — and that patience and staying power matter more than picking the perfect entry point.

Who it is for

DWAS is built for tactical traders and investors comfortable with high volatility and willing to actively monitor their holdings. It is also used by institutions as a satellite holding — a small sleeve of a portfolio that adds a tactical small-cap momentum tilt. It is less suitable for passive buy-and-hold investors, people saving steadily for retirement, or anyone who finds violent portfolio swings psychologically uncomfortable.

The fund is agnostic about fundamentals, so it can hold excellent companies in the early stages of a boom, but it can just as easily hold duds if they happen to be rising. Investors using this fund should do their own homework on the actual businesses if they want to avoid owning fundamentally broken companies that are rising purely on speculation or herd behavior. Alternatively, they can treat it as a pure momentum play and accept that some holdings will be damaged goods by the time the momentum reverses.