Momentum is a favored investment factor, but that doesn’t mean it’s risk-free. Investors can prepare for momentum turbulence with the AGFiQ U.S. Market Neutral Momentum Fund (MOM).
A long/short exchange traded fund, 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.
In general, momentum is the tendency of an investment to exhibit persistence in its relative performance; a “momentum style” of investing emphasizes investing in securities that have had better recent performance compared to other securities.
The Momentum Strategy
The momentum strategy is based on a simple idea: stocks which have performed well in the past, should continue to perform well. On the other hand, stocks which have performed poorly in the past should continue to perform poorly.
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 fund offers the opportunity to generate positive returns regardless of the direction of the general market.
Momentum tends to be negatively correlated to factors like size and value since momentum identifies securities that are trending upwards, as these stocks tend to reflect successful companies with positive trends that become bigger and bigger. Consequently, investors can also enjoy the diversification benefits of adding momentum strategies to small-cap and value-heavy portfolios.
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.
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 AGFiQ, MOM’s issuer.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.