Here's Why it is the Right Time to Invest in Momentum ETFs

Wall Street has seen a lot of turbulences in 2020 so far and Nov 3 elections are just adding to the uncertainties. However, there have been bright spots, for instance, a spectacular August for the Dow and the S&P 500 since 1984 and 1986, respectively. Also, positive developments with respect to the coronavirus vaccine, Fed’s support, U.S. fiscal stimulus and a rebounding U.S. economy with an improving job market have kept investors' optimistic amid the crisis.

Meanwhile, market participants have been increasingly worried about a spike in new coronavirus cases in several countries in Europe and some U.S. states, lack of vaccine or a line of treatment for coronavirus and uncertainty regarding a fresh round of fiscal stimulus from the U.S. government. Moreover, Trump testing positive for coronavirus shook markets and made investors increasingly apprehensive. However, Trump’s improving health condition and his return to the White house from the Walter Reed National Military Medical Center have calmed investors to an extent.

In the current situation, analysts believe that the market's worst is largely over as negative estimates have already been factored into the valuations. Moreover, despite the lack of a second round of stimulus package amid an aggravating coronavirus outbreak, the economy is still growing, though at a slow pace.

Given the current scenario, investors are desperately looking for opportunities for their portfolios that can help them gain despite the political and health uncertainties. Against this backdrop, let’s look at some factors that are favoring investment in the momentum ETFs:

Reduced Election Uncertainty

Following the first of the three presidential debates in Cleveland, things seem to be in favor of Mr. Joe Biden. According to data from Smarkets, Biden’s chances of winning are now pegged at 62%, while odds in favor of Trump are at 38%, per a Yahoo Finance article. Going on, data from U.K.-based Oddschecker reflects that Biden’s chances of winning have risen to more than 58% while Trump’s have declined to around 42%, according to the same Yahoo Finance article.

Moreover, according to a fresh poll of registered voters brought out on Oct 4 by The Wall Street Journal/NBC News, Biden leads the presidential race by 53% to 39%, as quoted on Yahoo Finance. Per the article, Goldman Sachs believes that Democrats coming to power could be good for the U.S. economy.

Improving U.S. Economic Outlook

The U.S. economy is moving toward record growth in the third quarter after a historic slump in the April-June period. In its latest forecast on Sep 25, the Atlanta Fed estimated 32% growth for third-quarter U.S. GDP.  The economy contracted at a 31.4% pace in the second quarter, marking the deepest decline since the government started keeping records in 1947.

Moreover, the job market continues to improve. Going by the U.S. Bureau of Labor Statistics, unemployment rate dropped 0.5% to 7.9% in September, the lowest amid the coronavirus pandemic. Jobless rate not only declined more than expected but fell for the fifth consecutive month. It’s worth mentioning here that the rate touched 14.7% in April, when the pandemic had peaked before subsiding.

Fed’s Support

The super-dovish Fed is a long-term positive for the stock market. On Sep 16, Fed Chairman Jerome Powell reiterated that the benchmark interest rate will stay zero or near zero, at least up to 2023. A low interest rate will decrease the cost of capital for businesses and consumers will have a lesser propensity to save due to a low deposit rate. Thus, higher spending by businesses and consumers is likely to boost the overall economy and raise stock prices.

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 Index. It charges 15 bps in fees per year and is a popular choice, with AUM of $11.97 billion (read: ETF Strategies to Gain From Vaccine Progress, M&A Deals).

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.

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 $685.2 million and an expense ratio of 0.39%.

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 also maintaining a moderate turnover and lower realized volatility compared with the traditional capitalization weighted indices. It accumulated $461.7 million in AUM and charges 0.20% in expense ratio.

SPDR Russell 1000 Momentum Focus ETF ONEO

With AUM of $214.3 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 (read: 2 New Factor-Based ETFs to Endure the Current Volatile Market).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.