We have been fielding questions on how funds with such low liquidity like the PowerShares Dynamic OTC Portfolio Fund (PWO) can score so well in our models. Indeed the fund is in Quant’s 10th position today and is once again the ETFGsm 10 Green Diamond fund. Whereas Quant incorporates liquidity in its Quality Score the fund does better in the Green Diamond Reward model because liquidity is measured on the risk side. Despite high Liquidity Risk scored at 7.1, PWO’s overall Red Diamond Risk Rating comes in low at 3.88 helped by low Country , Efficiency, Volatility and Structure Risk.
That high Liquidity Risk score is on a scale of 10 and translates into Quant’s very low 8.1 liquidity score on a scale of 100. Numbers like that warrant attention so it is probably best to avoid market orders with PWO. Those scores calculate measures relating to average bid ask spreads and trading volume and the former is on the high side while the latter is very low. However liquidity is not weighted higher in our models because the unique attributes of ETFs make it less important than other security types. Since the authorized participants are incentivized to provide any necessary liquidity, your concerns should be focused on the liquidity of the underlying which are comprised of 99 well traded US equities spanning sectors and market caps. It is the attributes of those constituents that ultimately determine the fund’s overall risk and you can sleep well at night holding less than 4 Red Diamonds.
We mentioned PWO has been scoring well and you can read more about the fund on our posts from April 5th and 12th. Not many funds have been consistently outperforming the S&P 500 this year but this smart beta fund has since it broke into Quant's top 10 in January. If you are trading more than the quoted size use a limit order or call your PowerShares representative to move a block. There’s no need to worry about the low volume and if you cannot get filled between the spread a few basis points isn’t going to hurt you too much when the fund performs as well as PWO has. We appreciate the questions so please keep them coming at firstname.lastname@example.org. Thanks for reading and have a nice weekend.