Market Rally Refreshes Allure of Momentum ETFs | ETF Trends

Some market observers were concerned the March market meltdown would derail momentum stocks, but those names are leading the rebound. Just look at the Principal Sustainable Momentum Index ETF (NasdaqGM: PMOM), which is higher by 32.43% off its March lows.

PMOM reflects the performance of the Nasdaq U.S. Sustainable Momentum Index, which uses a quantitative model to identify equity securities within the Nasdaq US Large Mid Cap Index that exhibit sustainable price momentum, based on historical stock prices over multiple periods and taking multiple market environments into consideration.

Momentum—once it picks up, it can be difficult to stop and while the debate in the capital markets is whether value can sustain its lead overgrowth, investors can’t forget about the momentum factor, especially if events like a coronavirus easing or cure stir a rally for riskier assets.

“Factor investing is said to be a strategy for long-term investors. It follows that any consideration of how factor portfolios behave in response to discrete events is irrelevant, as investors should focus on long-term performance,” reports IPE.

Pleasant Surprise

The momentum factor was actually a pleasant surprise in the first quarter, but what’s bolstering PMOM in recent weeks is the resurgence of smaller stocks. The average market value of PMOM’s 135 holdings is $6 billion, putting it in mid-cap territory. The current wave of momentum following a potential coronavirus vaccine is not only benefitting large cap equities, but also certain small caps.  Investors can look for opportunities in small caps to strike while the iron is hot.

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.

Important to the PMOM thesis over the near-term is the reopening of the U.S. economy and the ability of lost jobs to be reclaimed because the fund devotes 45% of its combined weight to energy and consumer discretionary stocks.

The momentum strategy is based on a simple idea, the theory about momentum states that stocks which have performed well in the past, should continue to perform well, while on the other hand, stocks which have performed poorly in the past, should continue to perform poorly.

For more on multi-factor strategies, visit our Multi-Factor Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.