Can Momentum Factor Keep Going After Dow Reaches New High?

With a tailwind of better-than-expected third-quarter earnings and optimism in a U.S.-China trade deal, the Dow Jones Industrial Average was able to attain a new high in Monday’s trading session. Nonetheless, there’s a lot of skepticism on whether this extended bull market can keep propelling the momentum factor.

Value has recently been coming to the forefront, particularly during the summer when investors were getting more strategic and looking for quality equities. In addition, a risk-off sentiment caused a deluge of investor capital into bonds.

Even as the value versus growth-momentum argument continues, a side argument can be said for factor investing in general.

“Globally, the volume of assets in factor funds rose from $565bn to $1.2tn in five years, according to Morningstar, and nearly two-thirds of institutions are looking at increasing allocations, FTSE Russell found last year,” wrote Steve Johnson in the Financial Times. “Unfortunately, this would-be gold rush has coincided with signs that some factors have lost their magic. Value investing has underperformed for a decade. Momentum, for two decades a winner, has lost its mojo since 2010, even as assets of trend-following hedge funds have tripled.”

Riding the Wave of Momentum with ETFs

Whichever way investors choose to allocate their capital when it comes to factors, following the herd via momentum can be an option by using ETFs. The technology sector, in particular, is continuing to ride a wave of momentum that was spurred by FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.

Here are a few funds investors can consider:

  1. Technology Select Sector SPDR ETF (NYSEArca: XLK): tries to reflect the performance of the Technology Select Sector Index, which is comprised of technology and telecom sector of the S&P 500. The ETF includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services.
  2. Fidelity MSCI Information Technology Index ETF (FTEC): tries to reflect the performance of the Nasdaq-100 Technology Sector Index, which consists of companies in the Nasdaq-100 Index classified as technology according to the Industry Classification Benchmark. QTEC currently holds 34 components and more-or-less equally weights its holdings.
  3. iShares U.S. Technology ETF (NYSEArca: IYW): reflects the performance of the Dow Jones U.S. Information Technology Index, which includes all tech sector picks in the Dow Jones U.S. Index. Due to the Dow Jones’ classification of information tech names, healthcare technology stocks may be included while payment technology stocks are excluded.

For more market trends, visit ETF Trends.