An ETF That Focuses on the Leading Outperformers in the Nasdaq

Exchange traded fund investors can consider a unique approach to momentum investing that may make a big difference to a portfolio and help unlock the outperformance potential of companies in the Nasdaq-100.

In the recent webcast, Unlocking the Nasdaq-100’s Outperformance Potential, Tom Dorsey, co-founder of Nasdaq Dorsey Wright, explained the benefits of momentum investments, which can help investors hone in on outperforming companies and rising market trends. Momentum refers to the inertia of a price trend that can either continue rising or falling for a period, and it usually incorporates both price and volume information. In technical analysis, momentum is used to help identify overarching market trends.

Chuck Fuller, senior vice president and head of quantitative strategies at Nasdaq Dorsey Wright, pointed out that momentum has been an outperforming factor over the years. For example, since 1927, momentum stocks have generated an average annual return of 14.12%, compared to the S&P 500’s 10.05% average annual return over the same period.

Fuller explained that momentum is a means for identifying leadership. The factor is an adaptive, tactical risk management tool that is based upon objective inputs (i.e., price, supply, and demand) and participates in long-term strength.

Potential investors should note that momentum is not a market forecasting “black box.” It is not a static, strategic indexing strategy, nor is it reliant upon subjective inputs (i.e., gut feel or manipulated valuations). Investors should not use momentum to target exact tops or bottoms in securities.

Fuller argued that momentum investments are attractive moves during periods that exhibit stable leadership with large dispersion in returns between the leaders and laggards. Potential investors should note that momentum does not do well in periods with major changes in leadership or choppy, trendless markets.

At Nasdaq Dorsey Wright, the Point & Figure Relative Strength tool is used in the ranking system for stocks or ETFs. Additionally, the Relative Strength Matrix Tool allows them to compare multiple securities against one another at the same time on a relative strength basis. It then ranks them from best to worst, according to the number of RS buy signals that each accumulates.

Looking at the matrix quintile returns for the Nasdaq-100, the top quintile exhibited an average annual return of 13.48% since 1999, compared to the 7.33% average annual return for the benchmark Nasdaq-100.

As a way to help investors access this momentum strategy, Simeon Hyman, head of investment strategy and global investment strategist at ProShares, highlighted the recently launched ProShares Nasdaq-100 Dorsey Wright Momentum ETF (QQQA).

“The momentum factor has displayed persistent outperformance throughout the previous several decades relative to the S&P 500 and Russell 1000,” Hyman said.

Tapping into Dorsey, Wright & Associates’ well-known momentum/relative strength methodology, the latest ProShares exchange traded fund tracks the Nasdaq-100 Dorsey Wright Momentum Index.

The index, the Nasdaq-100 Dorsey Wright Momentum Index, which is constructed and maintained by Dorsey, Wright & Associates, LLC, consists of 21 securities from the Nasdaq-100 index with the highest price momentum as determined by Dorsey Wright. Based on market capitalization, the Nasdaq-100 includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market.

QQQA’s underlying index rebalances on a quarterly basis, which is appropriate for this strategy. It gives the fund’s winners room to breathe and continue appreciating while eschewing frequent rebalancing, which can lead to a myopic, near-term focus. Said another way, QQQA helps investors capitalize on the long-term potential of momentum, which can also deliver over longer time horizons.

Financial advisors who are interested in learning more about the momentum investing can watch the webcast here on demand.