There are decisions to be made between momentum or
bottom-fishing investing, also known as laggard investing. The
reality is that an investor can do both; he or she can invest in
the market favorites, which is momentum investing, and also invest
in laggards, which is bottom fishing. Bottom fishing is also known
as buying fallen angels, which are asset classes that are out of
favor. One asset class has poor momentum and the other has good
momentum. But investing in just one of the asset classes could be a
problem: You are making an all-out bet that the good momentum group
will continue and/or the poor momentum group will turn.
Exacerbating the problem of all-or-nothing momentum investing is
the way that markets move. In my book
Winning with ETF Strategies
(Minyanville/FT Press 2012), the Birinyi study shows what returns
you would have gotten if you had been out of the market on the
worst five days each year, if you had been out of the market on the
best five days each year, and if you had simply held the
(INDEXSP:.INX) through the good days and the bad days of each year.
The results show that if you are out of the market on the best
days, your performance will suffer -- and one never knows when the
good days will be. So it is best to be in the market. If you are
net long almost all of the time, which seems to be a good strategy,
it is a higher risk strategy to just pick one momentum asset class
subset to invest in.
Generally I prefer to invest in laggards if the fundamentals look
alright. If I'm right on the valuations, the future investment
probabilities, and the overall economic outlook, the trade will be
profitable. It might take a while because it takes time for
laggards to turn.
Others like momentum plays, which is buying the hot groups. I've
been burned too many times to invest that way. When groups are hot
and making new highs, and everybody's piling in, it's too late in
the game for me.
According to how you want to invest, you will have to devise an
allocation strategy. For instance, you could have perhaps 20%
laggards at certain times and 40% laggards at other times. The
biggest factor is your risk appetite. Momentum asset classes often,
but not always, have more risk than laggard asset classes. Often
lower multiple classes are less risky than higher multiple classes.
A Momentum ETF
If you want to invest in momentum, consider the social media class.
Social media stocks such as
) have been leading the market and have turned into the momentum
players' favorite trading and investing names. Many social media
stocks have characteristics that are typical of momentum stocks, in
that they have high multiples, if they have any earnings at all.
Global X Social Media Index ETF
) offers exposure to many of the well-known social media stocks.
Its holdings include LinkedIn, Facebook,
(HKG:0700), and other social media favorites. Certainly SOCL is a
momentum security, and like other momentum asset classes that are
still young from an earnings standpoint, somewhat like biotech and
genome companies as well as alternate energy companies, the
companies are expected to produce stellar earnings, but have yet to
do so. The multiple of SOCL is 32 times, which means that the
stocks in the ETF have been bidden up, and the stocks are selling
at higher multiples, which identifies SOCL as a momentum play.
A Laggard ETF
Recently there has been a wide divergence between investors not
favoring emerging markets and the potential economic realities of
the post-Lehman crisis world economies. Global investors are mostly
significantly underweighting emerging markets relative to developed
countries, both in North America and Europe. This underweighting
creates a potential opportunity for investors, since merely
bringing weightings back up to pre-crises levels could lift the
emerging markets asset class. In the pre-crisis times, it was
common to hear that emerging markets should comprise about 30% of a
portfolio. You seldom hear that anymore since investors think it
should be a much lower allocation.
The most compelling part of the emerging market investing outlook
is the increase in the middle class. With a growing middle class,
there is sustainable growth, more than with merely an export growth
economy. This is true in all of the emerging markets countries,
including China. The Brookings Institution reports that China's
middle class is the second largest in the world in absolute terms,
at 157 million consumers. The US is first. Still, the China middle
class is small in relative terms, comprising on 12% of the
population. By 2020, most of China's population could belong to the
middle class, consuming nearly $10 trillion in goods and services.
The middle class growth in emerging markets scenario includes the
economics that go into a country's reduction of poverty. A
country's internal consumer market usually improves when people
move from poverty into the middle class. This increased consumption
includes food and shelter and expands out into consumer durables
and services. For instance, although China is experiencing
difficulties in housing and other areas of its economy, its
estimated GDP is still higher than most developed countries. If
China can continue its growth, housing, autos, and consumer durable
goods will benefit.
For exposure to a speculative but low-multiple ETF in the emerging
market space, consider the
Guggenheim Small-Cap China ETF
(NYSEARCA:HAO). HAO is volatile, having lost about 50% over the
last two years, but that is after gaining about 120% from the lows
attained during the Lehman crash lows. Investors have to be patient
with HAO, and the security has risk. HAO replicates an index
created by AlphaShares and is constructed to include small-cap
mainland China based publicly traded companies. To be included into
the index, a company must have a capitalization of at least $200
million and under $1.5 billion. HAO sells at about 10 times
earnings, which is reasonable. The major sectors in the ETF are
industrials, financials, and consumer discretionary, and it allow a
good exposure to the internal growth of China.
Editor's Note: Max Isaacman is the author of
Blizzard of Money
Winning with ETF Strategies
Investing with Intelligent ETFs
How to Be an Index Investor
The NASDAQ Investor.