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Inside PowerShares' New Momentum ETF

Zacks Equity Research

Despite the latest upheaval in the global market, slowdown in a host of developed and emerging nations and ambiguity over the timeline of the Fed rate lift-off, building a position in the high momentum stocks and the related ETFs could hold the key to profit in a wavering market.  After all, the Fed is still dovish and plenty of developed and emerging economies are pursuing accommodative monetary policies, guaranteeing no shortage of cheap money inflows.


To do so, investors can take a look at the recently launched PowerShares S&P 500 Momentum ETF (SPMO).


Inside SPMO


The fund tracks the performance of stocks in the S&P 500 Index having high momentum characteristics. Expense ratio comes in at 0.25%. Holding 101 securities in its basket, the product is moderately spread out across components with Amazon (5.76%), Walt Disney (4.85%) and Pfizer (4.77%) taking top three spots.


Consumer Discretionary is the fund’s top sector with over 32% exposure followed by Health Care (26.8%). Consumer Staples (17.95%) and Information Technology (11.21%) also get double-digit exposures. The fund is light on Industrials, Financials, Materials and Energy. It is regulated by large-cap growth stocks with over 58% exposure trailed by large-cap blend stocks (24.7%) and large-cap value stocks (8.6%) (see all large-cap ETFs here).


How Does it Fit in a Portfolio?


This ETF could be appropriate for investors seeking a momentum play on the high-flying market segments. Though the recent indicators point toward weakness in the U.S. economy, the negative news has been discounted.

 

Downbeat economic data points led the Fed to stay put which in turn fueled the stock markets. In fact, very few market participants expect a rate hike this year with most bets shifting to early next year.


The S&P 500 index advanced 7.4% in the last one month. The latest round of bullish tech earnings assisted to the S&P 500’s impressive ride. On a year-to-date basis, the index finally managed to stay positive. So far this year (as of October 23, 2015), the benchmark progressed just over 0.7%.


In this sort of a rebounding market backdrop, high momentum stocks and the related ETFs like SPMV could prove beneficial for investors. The momentum play provides a nice opportunity to capture the returns of the securities during strong bull markets.


Notably, the sectors picked by the ETF have so far managed to brave the economic sluggishness and could outperform in the days ahead on their sound underlying fundamentals (read: Do You Need a High Momentum ETF?).


ETF Competition


Though the space is not packed with products, it is not vacant either. iShares MSCI USA Momentum Factor ETF (MTUM), Dorsey Wright Focus 5 ETF (FV), Cambria Value and Momentum ETF (VAMO)  and SPDR S&P 1500 Momentum Tilt ETF (MMTM) are some of the other products in the momentum space (read: Are These Momentum ETFs Better Bets than SPY?).


The momentum ETF space is ruled by FV, which has about $4.19 billion in assets and is up about 3.7% this year against the 1% rise in SPY. MTUM has been yet another high-flier this year, having returned about 6% (as of October 23, 2015). PowerShares DWA Momentum Portfolio ETF (PDP) with an asset base of $1.9 billion is yet another popular product in the space.


Bottom Line


Given the limited competition in the space and low expense ratio, the fund has a good chance of building a sizeable asset base, at least if it manages to generate decent returns in excess of its expense ratio. However, MTUM and MMTM emerge as potential threats as they charge only 15 and 12 bps in fees, respectively, even lower than SPMO.


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PWRSH-SP5 MO PF (SPMO): ETF Research Reports
 
ISHRS-MSCI US M (MTUM): ETF Research Reports
 
SPDR-SP15 MT (MMTM): ETF Research Reports
 
FT-DORSEY WFFF (FV): ETF Research Reports
 
CAMBRIA-VAL&MOM (VAMO): ETF Research Reports
 
PWRSH-DWA MO PO (PDP): ETF Research Reports
 
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