With the U.S. equities market pushing higher on a stronger economy and company earnings, investors may look to a momentum exchange traded fund to capture further growth ahead.
For instance, the Fidelity Momentum Factor ETF (NYSEArca: FDMO) has gained 10.2% year-to-date, compared to the S&P 500’s 9.5% rise.
FDMO includes large- and mid-cap U.S. companies that exhibit positive momentum signals. Companies include those with historically high total and volatility-adjusted returns, high positive earnings surprises and low average short interest.
“Momentum investing involves selecting stocks that have recently outperformed, based on the idea that ‘the trend is your friend’ and that stock market leaders often continue to outperform,” Fidelity Investments analysts, led by Darby Nielson, said in a research note.
Some believe that investors usually insufficiently react to improving fundamentals, such as earnings growth or company trends. The equities market, though, tends to follow earnings trends, and it’s usually not until a company stock is outperforming that investors begin to jump on the bandwagon. Consequently, this phenomenon allows a momentum investing style to invest high and sell higher.
“This dynamic is partly what allows winners to keep winning and momentum investing to work,” Fidelity analysts said.
Given its focus on companies’ earnings growth, the momentum strategy can be an effective way for investors to hone in on growth-oriented companies as these stocks with positive momentum typically continue to generate strong earnings.
According to Morningstar data, FDMO also includes a 39% tilt toward the growth style box. The ETF’s portfolio is also chock-full of growth stocks, such as Apple (NasdaqGS: AAPL) 4.2%, Alphabet (NasdaqGS: GOOGL) 3.2%, Microsoft (NasdaqGS: MSFT) 3.0% and Amazon (NasdaqGS: AMZN) 2.2%.
Due to its growth orientation, the ETF is also heavy on cyclical and economically sensitive sectors, including technology 23.5%, financial services 13.3%, industrials 10.4% and consumer discretionary 10.4%.
For more information on alternative indexing strategies, visit our smart beta category.