Supporting the ongoing growth in smart beta strategies, factors such as quality, momentum, value, size and minimum volatility have been drivers of returns across asset classes and helped shore up shortcomings of traditional market cap-weighted index funds.
Potential investors, though, should be aware that the momentum strategy typically works well under sustained market rallies and could breakdown during volatile conditions. Since defensive stocks typically do better during volatile conditions, the momentum strategy could load up on conservative picks and miss out on the initial recovery in riskier assets.
“Momentum was actually a really interesting case, because unlike value and low volatility, actually industry selection was pretty important to the success of the momentum factor. So, those results were quite interesting. The findings did depend, as you mentioned, on the factor that we looked at,” said Morningstar in a recent note.
Although it emphasizes momentum, PDP’s holdings are mostly large-cap names as highlighted by an average market value of $61.7 billion for the ETF’s holdings. PDP debuted just over 10 years ago and has $1.4 billion in assets under management.
For more on smart beta ETFs, visit our Smart Beta Channel.