Neutral Momentum Strategy Starting to Pay Off | ETF Trends

In theory, it may seem hard to apply neutrality to momentum investing, but the AGFiQ U.S. Market Neutral Momentum Fund (NYSEArca: MOM) uses a unique long/short methodology that is paying off for investors.

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. MOM has recently been impressive, surging 5.63% month-to-date.

“MOM’s objective is to seek performance results that correspond to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Thematic Market Neutral Momentum Index,” according to AGFiQ. “In striving to achieve this objective, 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.”

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.

MOM’s Sector Allocations

MOM has 200 long positions and 200 short positions with the financial services, industrial and technology sectors being the fund’s largest sector allocations across both its long and short exposures.

The fund “provides consistent exposure to the momentum factor by investing in the underlying index which reconstitutes and rebalances monthly in equal dollar amounts in equally weighted long high momentum (high returns) positions and equally weighted short low momentum (low returns) positions within each sector,” according to the issuer.

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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