With a recent resurgence for some of the riskier corners of the equity market, the AGFiQ U.S. Market Neutral Momentum Fund (MOM) is showing signs of life after gaining more than 3% last week.
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.
Momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that “the trend is your friend” and that stock market leaders typically continue to outperform. This type of strategy can be an effective way for targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
“Momentum is the rate of acceleration of a security’s price or volume – that is, the speed at which the price is changing,” according to Investopedia. “Simply put, it refers to the rate of change on price movements for a particular asset and is usually defined as a rate.”
How MOM ETF Works
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 outperformance.
“Think of it like the momentum of a train,” notes Investopedia. “When a train starts, it accelerates but moves slowly. In the middle of the trip, it stops accelerating but travels at a higher velocity. At the end of the trip, the train decelerates as it slows down.”
MOM can buffer against the gyrations associated with momentum investing via its short positions.
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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