ETF Trends
ETF Trends

The momentum factor is one of the best-performing individual investment factors this year, buoying smart beta exchange traded funds such as the Fidelity Momentum Factor ETF (NYSEArca: FDMO).

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.

Investors often link momentum and growth stocks and while there are differences between the two investment factors, ETFs following those factors often have similar sector exposures. Notably, growth and momentum factors can and do expose investors to technology stocks.

FDMO, which is 13 months old, tracks the Fidelity U.S. Momentum Factor Index, “which is designed to reflect the performance of stocks of large and mid-capitalization U.S. companies that exhibit positive momentum signals,” according to Fidelity.

The strategy is working as highlighted by FDMO’s year-to-date gain of almost 15%. The momentum strategy basically bets that hot movers will continue to rise, so investors would buy high and sell even higher. Investors who want to follow this momentum strategy will be betting on outperforming sectors flying even higher.

FDMO allocates over 24% of its weight to the technology sector, which is usually the largest sector weight in growth and momentum ETFs. The financial services and healthcare sectors combine for just over 28% of the fund’s weight.

Related: More Investors Are Considering Smart Beta Bond ETFs

Given its focus on companies’ earnings growth, the momentum strategy can be an effective way for investors to hone in on growth-oriented companies as these stocks with positive momentum typically continue to generate strong earnings.

FDMO’s top 10 holdings, which combine for 23% of the ETF’s roster, include Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT) and Facebook Inc. (NASDAQ: FB).

FDMO charges just 0.29% per year, or $29 on a $10,000 investment. That is slightly below average for U.S. large-cap smart beta strategies. Fidelity clients can realize additional cost savings with FDMO by trading the ETF commission-free on the Fidelity platform.

For more on Smart Beta ETFs, visit the Smart Beta Channel home page.

Tom Lydon’s clients own shares of Apple, Facebook and Microsoft.

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.