Trending
With growth stocks having captivated investors’ hearts and minds for an extended period now, it’s likely that more clients are inquiring about momentum investing – a style that’s often conflated with growth. What many clients don’t realize is that momentum is sector- and style-agnostic because it’s rooted in embracing the stocks that are performing well and ditching the laggards.
“Momentum investing is a trading strategy that involves trading stocks that are moving rapidly higher—or lower—and then exiting positions before the prices begin to move in the opposite direction. A form of market timing, momentum investing seeks to exploit short-term price movements in stocks,” according to FINRA.
Alright so momentum involves a minor element of market timing AND selling underperformers. Sounds like a lot of work for an ordinary investor or client to take on. The Fidelity Momentum Factor ETF (FDMO) eliminates those burdens. Elegant in its simplicity, FDMO is a passive fund tracking the Fidelity U.S. Momentum Factor Index.
Home to $564.4 million in assets under management, FDMO is a classified as a large-cap growth fund by Morningstar as about 78% of the ETF’s 129 long positions are mega- and large-cap stocks. Speaking of Morningstar labels, the Fidelity ETF is rated four stars with a gold medal by the research firm.
FDMO Deserves the Kudos
Like many momentum funds, FDMO leans into technology stocks, but not excessively so. That sector represents 34.61% of the ETF’s roster, which is actually slightly below the S&P 500’s exposure to that group.
“The portfolio is overweight in financial services and energy relative to the category average by 4.6 and 2.5 percentage points, respectively,” notes Morningstar. “The sectors with low exposure compared with category peers are technology and consumer cyclical, underweight the average by 10.2 and 3.1 percentage points of assets, respectively.”
Proving its methodology is worthy of evaluation by advisors, FDMO has put together an impressive five-year run in which it’s beaten the broader market and some competing momentum ETFs despite being somewhat underweight tech stocks.
(Chart Courtesy: Morningstar)
FDMO: https://www.morningstar.com/etfs/arcx/fdmo/quote
SPY: https://www.morningstar.com/etfs/xnas/dvsp/quote
MTUM: https://www.morningstar.com/etfs/bats/mtum/quote
Though not a tech fund in disguise, FDMO features some sector-level advantages. For example, the ETF’s roughly market-weight exposure to financial services stocks could be a plus for patient investors as that sector’s dividend growth profile is restored.
FDMO: A Look at Its Risk-Adjusted Momentum Performance
Acknowledging that momentum investing can subject investors to bumps and that style isn’t always for the faint of heart, FDMO deserves more praise for its long-term risk-adjusted performance.
In ETF form, this strategy “led the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period. Sometimes better performance is found among strategies with higher risk profiles,” adds Morningstar. “However, this strategy had a lower standard deviation, 16.8%, compared to the benchmark’s 18.9%. Finally, the share class proved itself effective by generating positive alpha, over the same five-year period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.”
Additionally, FDMO’s annual fee of 0.16% is comparable to rival ETFs and far less expensive than what advisors encounter in the realm of open-end mutual funds dedicated to momentum. In fact, Fidelity ETF is in the cheapest quintile in its respective Morningstar category, making it easier for clients with long-term horizons to stick with the fund.
Related: Why Gold Should Stand Independently in Portfolios
Click here for standard performance data, risks, and prospectus for Fidelity Momentum Factor ETF
Fidelity Investments and Advisorpedia are not affiliated.
Fidelity Distributors Company LLC
900 Salem Street
Smithfield, RI 02917