Simeon Hyman on Striking the Sweet Spot with Momentum Investing

It’s not often in ETF Land that we see a completely new take on an old theme, but that’s exactly what occurred last week with the launch of the Proshares Nasdaq-100 Dorsey Wright Momentum ETF (QQQA).

QQQA is the first factor-based ETF based on the Nasdaq 100 Index, the benchmark that underpins the uber-popular Invesco QQQ Trust (QQQ).

It uses a momentum investment approach, which attempts to gain exposure to stocks that are rising and reduce exposure to ones that are falling.

Recently Lara Crigger, the Managing Editor for ETF Trends, sat down with ProShares global investment strategist Simeon Hyman to learn more about how QQQA fits into a portfolio, and why now might be the ideal moment for momentum investing.

Crigger: Please tell us a little about the new fund. Why partner with Dorsey Wright for the product?

Hyman: Dorsey Wright is perhaps the leading voice in applying momentum. Their approach is followed by billions of dollars in asset management, and their tools are used by advisors and portfolio managers around the world.

To us, it was a no-brainer to wrap the Nasdaq-100, the quintessential large cap growth index, together with the leading voice in momentum. Really, we were just surprised that nobody had done this before.

Crigger: Momentum investing is all about profiting from upward trends. As the economy reopens, why is now the right time for that approach?

Hyman: The thing that people forget about momentum, which makes it less a question of timing and more of an evergreen strategy, is that it tells you not just what to buy, but what not to buy. Those two things are two sides of the same coin.

So as a factor, I don’t think there’s ever really a bad or a good time for momentum investing. It’s an effective guide, up there with any of the other factors.

Crigger: True. And even beyond factor investing, specifically, so much of investment performance is avoiding stinkers, right? It’s not just finding the outperforming stocks, but making sure that you’re not invested in stocks that are going to tank.

Hyman: Yes. [QQQA’s] strategy picks out the 21 stocks in the NASDAQ 100 Index that rank highest on the Dorsey Wright momentum score. Then we equally weight them. That equal weighting is important too, because there’s a lot of top-heaviness in the NASDAQ 100, and in the large cap growth space in general. Equal weighting is an effective portfolio construction approach to drive toward the best risk-reward combination.

Crigger: But isn’t 21 holdings fairly concentrated?

Hyman: Twenty-one [holdings]is kind of one of those classic numbers somewhere in the 20-30 range, where the old school stock picking literature found that sweet spot between concentration and diversification.

Crigger: Why take an index approach? Because momentum investment can change quickly, but the index rebalances only a couple of times a year. So how do you avoid always buying high and selling low?

Hyman: The index is reconstituted quarterly. That’s a pretty decent place to be. In a momentum strategy, you have to let the winners run a little bit. So you don’t really want swap this thing around once a month. That would probably be a little too frequently. But you certainly wouldn’t want to do it once a year. Much like how 21 [holdings]was a sweet spot of concentration/diversification, we anticipate quarterly to be a good balance between letting the winners run, and refreshing the ranking on an appropriate periodicity.

Crigger: Momentum ETFs tend to be dominated by tech stocks, and the NASDAQ 100 Index is already very tech heavy. So you’re doing tech on top of tech, momentum on top of momentum. How do you see this fitting into a portfolio?

Hyman: I’m going to claim what you said as a feature, not a bug. One of the challenges of momentum investing is that, if you’re fishing in the very broad market universe, the fund can really change its stripes on you. In effect, you could have a value fund for a little while, then have a growth fund. Things can move around a lot. But here, they’re going to move around a little less, because we’re only fishing in the NASDAQ 100.

We know exactly where this goes in your portfolio. This is unabashedly the large cap growth component of your core equity holdings. And it will it will pretty much behave like that because we are picking from the NASDAQ 100. You could also deploy it as a factor satellite, too.

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