The momentum and value factors do not often meet under the umbrella of a single exchange traded fund, but when they do, the outcome is potentially compelling for investors. Investors looking for that combination may want to consider the Alpha Architect Value Momentum Trend ETF (CBOE: VMOT).
The Value Momentum Trend ETF tries to reflect the performance of the Alpha Architect Value momentum Trend Index, which utilizes a proprietary methodology developed by Empirical Finance, d/b/a Alpha Architect to select component holdings. The fund is also a fund-of-funds, so it primarily holds assets in shares of other ETFs.
VMOT “combines value and momentum. Each has been an effective factor strategy over the long term, and they complement each other well,” said Morningstar in a recent note. “While this strategy incorporates standard value and momentum selection criteria, this is a distinctive portfolio that screens for quality and has more-pronounced factor tilts than many of its peers. It invests in stocks listed in both the U.S. and foreign developed markets.”
A “momentum” investment style emphasizes investing in securities that have had better recent total return performance compared to other securities, whereas a “value” investment style emphasizes investing in securities that based on quantitative analysis are considered undervalue compared to other securities.
Under the Hood of VMOT
VMOT is an ETF of ETFs and its holdings are other Alpha Architect funds, such as the Alpha Architect ETFs, including the U.S. Quantitative Value ETF (CBOE: QVAL), International Quantitative Value ETF (CBOE: IVAL), U.S. Quantitative Momentum ETF (CBOE: QMOM) and the International Quantitative Momentum ETF (CBOE: IMOM).
VMOT’s “two value sleeves start with all stocks with a market cap of at least $2 billion (excluding financials, where Alpha Architect’s quality and value screens don’t work as well),” said Morningstar. “They first eliminate stocks with potential problems from the eligibility list, including firms with high earnings accruals. High accruals may be a sign that a company is managing its earnings, in which case reported earnings may not paint an accurate picture of the firm’s financial condition.”
VMOT’s momentum approach has some important differences relative to its value counterpart.
“The two momentum sleeves start with a similar universe as the value sleeves, but they include financials. These portfolios rank stocks on their total returns over the past 12 months, excluding the most recent one, and screen for the top-scoring 10%. These portfolios screen those stocks on the quality of their momentum, favoring those with more consistent positive returns,” according to Morningstar.
In downtrending markets, the underlying index may hedge up to 100% of the value of its long portfolio by shorting a representative broad based U.S. securities index ETF when either one or both conditions are met: First, the U.S. equity markets’ total return over a rolling twelve calendar month period is less than or equal to U.S. Treasury bill returns over the same period. Second, the U.S. equity markets’ twelve month moving average exceeds current price.
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