Assessing An Active Momentum ETF

Momentum is one of the most widely followed investment factors, a status indulged by a slew of exchange traded funds. There are even some actively managed ETFs emphasizing momentum, including the MomentumShares U.S. Quantitative Momentum ETF QMOM.

QMOM is part of the Alpha Architect family of ETFs, which also includes the ValueShares International Quantitative Value ETF IVAL and the ValueShares U.S. Quantitative Value ETF QVAL. QMOM also has an international counterpart, the International Quantitative Momentum ETF IMOM.

“QMOM is a self-indexing fund that seeks to track the total return performance, before fees and expenses, of the Alpha Architect Quantitative Momentum Index,” according to Alpha Architect.

QMOM employs a multi-tiered screening process in selecting its 50 holdings.

QMOM's Strategy

“This fund ranks the 1,000 largest U.S. stocks on their price returns over the trailing 12 months (excluding the most recent one) and screens for the highest ranking 100” said Morningstar. “It then ranks these stocks on the quality of their momentum, as measured by the number of days each stock has positive returns, and targets the higher-ranking half. The idea here is that stocks with lots of up days are more likely to enjoy a gradual price appreciation that is more indicative of investor underreaction than stocks with less consistent momentum.”

Unlike most momentum ETFs, QMOM is concentrated and active, which means the fund could lag in the short-term. Conversely, patient investors could be handsomely rewarded over long-term holding periods.

Current Stats

QMOM's holdings currently include Applied Materials Inc. AMAT, Brink's Company BCO, Morgan Stanley MS, NVIDIA Corporation NVDA and Wix.Com Ltd WIX.

The ETF's approach to momentum is more aggressive than what is seen with passive funds and since QMOM is an actively managed fund, its turnover can run high.

“The fund weights its holdings equally, which adds to its already-high turnover and introduces a permanent bias toward smaller stocks,” according to Morningstar. “It updates the portfolio each quarter, one month prior to the quarter-end to take advantage of seasonal effects. There are no buffers in place to mitigate turnover, so it will trade even if doing so doesn’t have a big impact on the fund’s momentum profile and the costs of trading exceed the benefit.”

QMOM is up almost 7 percent over the past year and just over half a percent this year. The ETF charges 0.79 percent per year, or $79 on a $10,000 investment.