Escalating trade tensions between the U.S. and China has plenty of investors repudiating momentum stocks, creating a perfect storm for alternative ETFs such as the AGFiQ U.S. Market Neutral Momentum Fund (MOM).
MOM seeks results that are in tune with Dow Jones U.S. Thematic Market Neutral Momentum Index. In order for the fund to accomplish its goal, “MOM provides exposure to the ‘momentum’ factor by investing long in U.S. equities that have had above-average total returns and shorting those securities that have had below-average total returns,” according to the fund’s fact sheet.
As technology and growth stocks have stumbled against the tough trade backdrop and concerns that a recession is lurking, MOM gained more than 5% over the past week, bringing its year-to-date gain to over 6%.
The momentum strategy is based on a simple idea, the theory about momentum states that stocks which have performed well in the past, should continue to perform well, while on the other hand, stocks which have performed poorly in the past, should continue to perform poorly.
High momentum stocks are those that are capable of rising very fast in a short period of time, which makes them very attractive to potential buyers. However, in many cases, these stocks can also crash unexpectedly and carry significant risks as a result. When handled properly, however, momentum trading can be a rewarding method of profiting from the stock market.
Marvelous MOM’s Approach
Recent price action confirms MOM’s approach is working and should continue to be effective as long as high momentum price stocks outperform low momentum price stocks. The way the fund is set up there is an opportunity to generate positive returns regardless of the direction of the general market.
If MOM’s “long positions appreciated more rapidly than its short positions, the Fund would generate a positive return. If the opposite occurred, the Fund would generate a negative return. In choosing to track a market neutral index, the Fund seeks to limit the effects of general market movements on the Fund,” according to AGF, MOM’s issuer.
MOM leans toward stocks with the highest total return and shorts stocks with the lowest total return. Accordingly, if the momentum stocks are outperforming, the fund should reflect the out-performance.
By market value, MOM’s long positions are typically larger than the stocks the fund shorts. Additionally, the fund’s long stocks have higher earnings multiples, but high valuations are often a trait of some of the stronger momentum equities.
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