One of the oldest investing maxims is “buy low and sell high.” If that conventional wisdom is to be believed, the momentum factor may seem counter-intuitive to some investors. After all, one of the basic premises of momentum investing is that a security that is in a strong uptrend can continue rising while a security in a pronounced downward spiral can continue falling.
While it is widely held that factors, such as low volatility and value, are winners over long holding periods, data also suggest that, over time, momentum can outperform broader benchmarks. Still, a slew of widely held misconceptions exist to this day.
“The long-term success of the momentum factor seems to be a challenge to many observers,” said Cliff Asness of AQR Capital Management. “People say things like ‘momentum only works among small stocks’ or ‘momentum only works for going short, not long.’ These comments, which appear to be aimed at casting doubt on the implementability of momentum, seem to be spoken about more than written. There’s a reason for that. When you run the numbers, these statements are just not close to true.” 1
Another quibble momentum critics have is that momentum as an idea is great, but its real world applications can be disappointing. The ALPS Dorsey Wright Sector Momentum ETF (SWIN) is an exchange traded fund (ETF) that helps investors efficiently harness the power of momentum stocks under the umbrella of a single fund with promising real world results.
SWIN’s performance since inception in early January 2017 dispels the notion that smaller stocks have to be the primary drivers of any out-performance delivered by momentum. Likewise, the ETF’s performance over the past 13 months has been vastly superior to widely followed value funds as the chart below indicates.
SWIN Market Return Since Inception
SWIN follows the Dorsey Wright US Sector Momentum Index. That benchmark’s selection universe is Nasdaq large- and mid-cap stocks with average daily dollar volume of at least $1 million. The index is rooted in point and figure charting, a technical analysis tool used by investors to note supply and demand activity within a stock. However, SWIN’s index goes further by encompassing relative strength in its methodology.
“Relative Strength is a momentum technique that relies on unbiased, unemotional, objective data, rather than biased forecasting and subjective research,” according to Dorsey Wright.2 “Relative Strength is a way of recording historic performance patterns, and Dorsey Wright and Associates (DWA) uses Relative Strength signals as an indicator for current momentum trends of a security versus others”
SWIN also seeks to solve a common problem associated with standard momentum strategies, that being excessive weights to a small amount of sectors and stocks. For example, the MSCI USA Momentum Index allocates nearly 38% of its weight to tech stocks, or more than 1,750 basis points above the benchmark’s second-largest sector weight.
Conversely, SWIN’s index, when it rebalances, assigns no more than 20% to three sectors with the best momentum and relative strength attributes and no more than 10 percent to the next four sectors with favorable momentum traits.
Momentum For The Long-Term
As we noted earlier, other investment factors are often thought to be better long-term ideas, but data suggest momentum is rewarding over long holding periods. Consider the chart below.
A compelling and familiar example of momentum being pervasive and effective over the long-term is Amazon.com Inc. (AMZN), SWIN’s third-largest holding (2.34% as of 1/31/18, held since inception of 1/10/17). Over the past five years, Amazon has returned a remarkable 422.93% to bring the stock to a price tag of just under $1,400 with a market capitalization of just over $670 billion. However, some analysts have $2,000 price targets on Amazon and some investors believe the company will eventually have a $1 trillion market cap.
In other words, momentum can be retained and that is one of the pillars of SWIN’s strategy.
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
The ALPS Dorsey Wright Sector Momentum ETF shares are not individually redeemable. Redeemed shares may be worth more or less that their original cost. Investors buy and sell shares of the ALPS Dorsey Wright Sector Momentum ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
The Fund seeks investment results that correspond (before fees and expenses) generally to the performance of the Dorsey Wright US Sector Momentum Index (the “Underlying Index”).
Dorsey Wright US Sector Momentum Index is a rules-based index intended to track the overall performance of the stocks with the highest relative strength or “momentum” within the NASDAQ US Large Mid Cap Index (the “NASDAQ Index”) on a sector-by-sector basis.
MSCI USA Momentum Index: It is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. The investment return and principal value of an investment will fluctuate. Additional information regarding the risks of this investment is available in the prospectus. Performance show is past performance. Current performance may be lower or higher that the performance quoted. Past Performance is not indicative of future results.
“Standardized performance for the ALPS Dorsey Wright Sector Momentum ETF (SWIN) can be found here. Current holdings for SWIN can be found here.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the The ALPS Dorsey Wright Sector Momentum ETF. AAI is affiliated with ALPS Portfolio Solutions Distributor, Inc.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
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