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A Momentum ETF With Some Steadiness

ETF Professor

Momentum is one of this year's leading investment factors and that theme is accessible a variety of exchange-traded funds. An upstart ETF dedicated to momentum stocks is the Fidelity Momentum Factor ETF (NYSE: FDMO).

FDMO, which launched in September 2016, 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 ETF is up more than 17 percent year to date and touched a record high Wednesday despite a generally poor day for U.S. equities.

Momentum investing often runs counter to the advice of “buy low and sell high.” Rather, the momentum factor, in part, is rooted in the idea that some stocks that have already rallied in considerable fashion can continue doing so.

Predictable Allocations

Investors often associate momentum stocks as also being growth stocks, although growth and momentum are categorized as different investment factors. Still, there are some sector-level similarities between growth and momentum funds.

For example, FDMO devotes nearly a quarter of its weight to the technology sector. That is not surprising, but what may surprise investors is the lack of risk and volatility associated with some FDMO's technology holdings. FDMO's two largest holdings are Apple Inc. (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT), two companies that can be found in quality and value funds in addition to momentum strategies.

FDMO's second-largest sector allocation is a 15 percent weight to financial services, a sector that is widely viewed as a value play. In fact, financials, while obviously a significant part of FDMO, are usually a major chunk in various value funds.

Cyclical And Defensive

Due to the fact that momentum investing is more about price momentum and is sector agnostic, a fund such as FDMO can blur the line between defensive and higher beta allocations. FDMO allocates almost 14 percent of its weight to the defensive health care sector.

Conversely, the ETF devotes over 22 percent of its combined weight to the cyclical consumer discretionary and industrial sectors. FDMO charges 0.29 percent annually, which is slightly below average within the U.S. large-cap smart beta category.

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