Momentum Is Cool for Now, but This New ETF Could Be Heating Up

High beta and value stocks are outperforming the S&P 500 this year while momentum names are being left behind.

For patient investors, that scenario could prove inviting when it comes to evaluating the newly minted Proshares Nasdaq-100 Dorsey Wright Momentum ETF (QQQA). QQQA debuted last month as the first factor-driven spin on the widely followed Nasdaq-100 Index (NDX).

Tapping into Dorsey, Wright & Associates’ well-known momentum/relative strength methodology, the new ProShares exchange traded fund tracks the Nasdaq-100 Dorsey Wright Momentum Index. A base definition of an equity-based momentum strategy is that it is likely to feature stocks that performed well over the past six months or year. In the case of QQQA, that means an almost 51% to tech stocks, which is slightly overweight that sector relative to NDX.

“Many of those stocks and sectors are now underperforming, and as a result, some momentum strategies have seen significant turnover as they undergo their rebalancing,” said ProShares Senior Investment Strategist Kieran Kirwan in a recent note.

A Better Momentum Strategy?

A rub with many momentum strategies is that are quick to shuffle sector exposures to remain allocated to stocks sporting strong momentum traits. That’s fine to appease near-term desires, but investors can be left vulnerable when factor leadership changes.

“If growth and technology stocks reassert their leadership, some momentum strategies may be left at a disadvantage due to their underweighted exposure,” adds Kirwan.

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.

As Kirwan points out, the Momentum Factor Index topped the S&P 500 in each decade from the 1960s onward.

“The index is an intriguing option for investors looking to focus on the stocks from the preeminent growth index with the greatest potential to outperform. It may also be a compelling option for those growth-oriented momentum investors looking for greater style consistency,” concludes Kirwan.

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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.

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