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 for targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
As we consider value and growth factor-based options, investors may also think about combining the two into a diversified portfolio.
“When combined, value and momentum factor strategies have the potential to provide more diversification than a combination of traditional value and growth style indexes, which simply offers broad-market exposure,” according to the Fidelity strategists.
While traditional value and growth style indices have traditionally shown a negative correlation, value and momentum factor strategies have a lower average historical correlation so they don’t offset one another, which should help the factors enhance diversification within an investment portfolio.
ETF investors interested in these two factors have a number of factor-specific, smart beta options available, such as the Fidelity Momentum Factor ETF (NYSEArca: FDMO) and Fidelity Value Factor ETF (NYSEArca: FVAL).
The line of Fidelity factor based ETFs can help investors achieve strategic and cyclical exposure, along with filling out an investment portfolio construction. By incorporating the various factor based ETFs into an investment portfolio, investors may be better able to diminish risks and still capture any upside potential.