The momentum gauge targets recent price movements over time as an indicator of future performance. Momentum traders believe that high-flying stocks will fly even higher. Behavioral economists may explain that the best performers are the ones that typically garner the most attention, which would help drive additional investment demand for the popular plays.
The quality of a company’s earnings is thought to be a good gauge of future earnings performance as high quality firms exhibit strong fundamentals.
Lastly, the volatility factor selects companies with relatively low volatility, so the index leans towards securities with the smallest swings. Many studies have shown that portfolios with less volatility or low beta offer a combination of above-average return and smaller drawdowns.
As a way to maximize returns while diminishing risks, the smart-beta ETFs’ underlying indices combine the five factors to potentially generate improved risk-adjusted returns for investors.
Financial advisors who are interested in learning more about smart-beta or factor-based ETF strategies can register for the Tuesday, February 23 webcast here.