The March broader market retrenchment dealt a blow to some momentum stocks, but when the factor rebounds, the Principal Sustainable Momentum Index ETF (NasdaqGM: PMOM) could be one of the ETFs that leads the way.
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.
When investing in these various factors, investors may notice that specific factors may outperform over short-term periods since they will act differently in differing market conditions. No single factor dominates or outperforms when looking at extended periods.
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.
PMOM Goes Further
PMOM goes further than rival momentum ETFs, providing investors with a cleaner, truer approach to the factor.
The underlying lying index 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), with volatility adjustments used to determine a composite score. Securities with SUMO scores that rank in the top 15% are included, along with securities already in the index that rank in the top 35%. Securities are weighted to give those in the higher ranking groups relatively more weight, depending upon market volatility.
While momentum strategies are sector agnostic, these funds are often light on defensive sectors. However, some of those groups are performing well or less poorly in the current environment. PMOM deals with that issue, allocating 28% of its weight to consumer staples and utilities stocks. That’s an overweight of 600 basis points to those sectors relative to the MSCI USA Momentum Index.
PMOM is home to 134 stocks with an average market value of $14.1 billion, which is small compared to rival momentum funds, but that puts the Principal ETF in position to benefit if mid-cap and smaller large-cap names bounce back.
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.