ETF Trends CEO Tom Lydon discussed the Principal Sustainable Momentum Index ETF (PMOM) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
PMOM tracks an index of large- and midcap US equities that exhibit sustainable price momentum. The Fund seeks to provide investment results that closely correspond, before expenses, to the performance of the Nasdaq U.S. Sustainable Momentum Index (the “index”). The fund typically invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities that compose the index at the time of purchase. The index uses a quantitative model designed to identify equity securities, including growth and value stocks, within the Nasdaq US Large Mid Cap Index that exhibit sustainable price momentum, based on historical stock prices over multiple periods and considering multiple market environments.
Momentum has been a leading factor play as investors jump on the rebounding equity market, having been up 17% over 1-week, and up 8% over 1-month. In this case, momentum is referring to the rate of acceleration of a security’s price or volume—that is, the speed at which the price is changing. Once a momentum trader sees acceleration in a stock’s price, earnings, or revenues, the trader will often take a long or short position in the stock in the hope that its momentum will continue.
Additionally, 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 of targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
Related: Can Momentum Sustain Its Mojo Moving Forward?
Momentum also capitalizes on the inefficient distribution of information within the market place. Investors who get in on the action first may have reacted to information first. As more people understand what’s going on, more will jump in on the trade, fueling the forward momentum.
Central banks’ policy response to the coronavirus crisis is seen as a contributing force behind momentum sturdiness. While momentum typically struggles during periods of high volatility, it benefits from the policy reaction to volatility, notably the Fed’s injection of liquidity.
Meanwhile, value has disappointed investors. Value typically works at a market bottom because investors anticipate a strong recovery on pent up demand. However, this recession was not caused by an aggressive Federal Reserve but by a coronavirus pandemic. Even as the pandemic subsides, unemployment may remain high, and consumption muted due to lingering restrictions and changes to consumer sentiment and behavior.
In relation to PMOM, the fund will screen each security and assign a corresponding Sustainable Momentum (SUMO) Score based on intermediate factors (3, 4, 5, 6, 7, 8, 9, 10, 11 and 12-month risk-adjusted returns) and long-term factors (36, 48, and 60-month risk-adjusted returns). Volatility adjustments are also used to determine a composite score. So the portfolio is a mixture of high momentum stocks with attractive risk-adjusted returns and low volatility.
Listen to the full podcast episode on PMOM ETF:
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