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3 Reasons Setting the Tone Right for Momentum ETFs

Sweta Jaiswal, FRM
·5 min read

The final leg of the last trading week of 2020 has begun. Despite all coronavirus-related adversities, Wall Street has pleasantly surprised investors with its performance in the ongoing year. The Down Jones Industrial Average has risen 5.8% so far in this year. The other two major indices, the S&P 500 and Nasdaq Composite, are also up 14.6% and 42.7%, respectively, in the same period.

Given the ongoing bullishness in the market, let’s take a look at some factors that are making the investing environment friendlier for momentum investing:

Trump Signing the Stimulus Bill

President Trump has finally signed the new coronavirus relief and government funding package worth $900 billion into law. This includes $600 stimulus checks to Americans, $300 per week in augmented federal unemployment insurance for unemployed individuals, around $300 billion in aid for small businesses, including $284 billion in forgivable Paycheck Protection Program (per the sources), and tens of billions of dollars across other provisions like rental assistance, vaccine distribution funds, Covid-19 testing and contact tracing efforts and broadband support. Going on, the airline payroll support is part of more than $45 billion in transportation relief funds (per a CNBC article). Moreover, the fiscal support funds will also direct $82 billion to K-12 and higher education, according to the same CNBC article as mentioned above.

Vaccine Rollout

The beginning of the inoculation process among people is highly buoying optimism. Notably, the two frontrunners in the COVID-19 vaccine race, namely, Moderna (MRNA) and Pfizer/BioNTech, have already received the emergency use authorization from the FDA for their coronavirus vaccines. Going by a CNBC article, pertaining to its goal to immunize 20 million people in December, the United States administered 1,008,025 shots as of Dec 23 morning. Per the Centers for Disease Control and Prevention (CDC) data, the country shipped a total of 9,465,725 doses across its length and breadth (per the same CNBC article as mentioned above).

Fed’s Support & Divided Congress

Fed, with its intention to keep supporting the economic recovery, has indicated that it will not hike rates until 2023. It is worth noting here that low rates are will help in ramping up economic activities and rebound from the coronavirus-induced slowdown. Going on, the Fed’s stand on the inflation-related policies is expected to fuel bullish sentiments.

Additionally, easing worries regarding major policy changes are making the investing environment more conducive for market participants. Notably, the chances of a divided Congress in the United States seem more likely with the Republicans continuing to control the Senate and the Democrats, the House. Due to this political gridlock, major and stringent changes in the corporate tax policies will be very difficult to implement in the medium term.

Momentum ETFs in Focus

Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. Here we present five ETFs that could outperform on the current market optimism. Further, these could beat broader market returns in the coming months if the optimism prevails.

iShares MSCI USA Momentum Factor ETF MTUM

This fund provides exposure to large and mid-cap stocks that exhibit relatively higher price momentum by tracking the MSCI USA Momentum SR Variant Index. It charges 15 bps in fees per year and is a popular choice, with AUM of $13.17 billion (read: 5 High Beta & Momentum ETFs to Tap the Santa Rally).

Invesco DWA Momentum ETF PDP

This fund tracks the Dorsey Wright Technical Leaders Index, which measures the performance of companies that demonstrate powerful relative strength characteristics. It has amassed $2.03 billion in its asset base and charges 62 bps in annual fees (read: ETF Strategies to Gain From Vaccine Hopes & Biden's Transition).

Invesco S&P MidCap Momentum ETF XMMO

This ETF follows the S&P Midcap 400 Momentum Index, which is designed to identify mid-cap firms with the highest momentum scores. XMMO has AUM of $862.8 million and an expense ratio of 0.34%.

VictoryShares USAA MSCI USA Value Momentum ETF ULVM

This fund tracks the MSCI USA Select Value Momentum Blend Index, offering exposure to large and mid-cap companies with higher exposure to value and momentum factors, while maintaining a moderate turnover and lower realized volatility compared with the traditional capitalization weighted indices. It accumulated $506.1 million in AUM and charges 0.20% in expense ratio.

SPDR Russell 1000 Momentum Focus ETF ONEO

With AUM of $249.3 million, this product targets large-cap securities with a combination of core factors (high value, high quality and low size characteristics) and a focus factor comprising high momentum characteristics. It follows the Russell 1000 Momentum Focused Factor Index and charges an annual fee of 20 bps.

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Invesco DWA Momentum ETF (PDP): ETF Research Reports
 
SPDR Russell 1000 Momentum Focus ETF (ONEO): ETF Research Reports
 
iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports
 
VictoryShares USAA MSCI USA Value Momentum ETF (ULVM): ETF Research Reports
 
Invesco S&P MidCap Momentum ETF (XMMO): ETF Research Reports
 
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Zacks Investment Research
 
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