Single ETF Targeting Value And Momentum On Its Way

by: Zacks Funds

Right now, investing in the global economy is torn between possibilities and perils. In the U.S., on the one hand, President Trump's fiscal stimulation is inking a great story for the equity market rally. On the other hand, his debatable policy formulations on trade, immigration and easing fiscal reforms are leading to skepticism.

Globally, while fundamentals are shoring up, election-related political risks in Europe, Brexit concerns, and ripple effects of Trump's foreign policies may lead to uncertainties. As a result, though investors intend to participate in the Trump rally, corporate earnings growth and a rebound in the global economy, mounting risks also matter.

In such a situation, nothing could be better for investors than having an ETF that targets both momentum and value characteristics at the same time. Probably, this is why Alpha Architect plans a fund, namely the Alpha Architect Value Momentum Trend ETF (BATS:VMOT), with this objective.

Inside VMOT

The fund looks to track the performance of the Alpha Architect Value Momentum Trend Index. It will be a fund made up of the firm's four other standing funds, revolving around either the momentum or the value criterion and targeting either domestic or international economies.

The four funds are namely the ValueShares U.S. Quantitative Value ETF (BATS:QVAL), ValueShares International Quantitative Value ETF (BATS:IVAL),
MomentumShares U.S. Quantitative Momentum ETF (BATS:QMOM) and MomentumShares International Quantitative Momentum ETF (NYSEMKT:IMOM). The product charges 79 bps in fees.

As per, VMOT's underlying index will deploy a risk-parity formula to regulate the fund's weighting breakdown between value and momentum exposure. To evade bearish markets, the fund may hedge up to 100% of the value of its long portfolio. The underlying index will be equally weighted between domestic and international ETFs. The fund assesses the necessity of hedging on a monthly basis.

How Does It Fit in a Portfolio?

The fund is an intriguing option for investors eyeing momentum plays on the high-flying market segments, at the same time minimizing overvaluation concerns by having an exposure to value stocks.

Momentum investing is a fascinating idea for those seeking higher returns in a short spell. It looks to reflect profits from buying stocks that are sizzling on the market (read: Beat the Market with Momentum ETFs).

On the other hand, value investing gives investors exposure to stocks that are trading below their intrinsic values and are considered cheaper. Value stocks usually have low price-to-earnings ratios, low price-to-book ratios and high dividend yields, as compared to their growth counterparts.

As already mentioned, investing in an ETF that gives exposure to both techniques, and is focused on both domestic and international stocks can prove lucrative on many occasions (read: 3 Low P/E Momentum ETFs & Stocks for Uncertain Santa Rally).

ETF Competition

The planned ETF is unique in its approach and is unlikely to face steep competition. Still, there are a few ETFs including the Cambria Value and Momentum ETF (BATS:VAMO) and PowerShares DWA Momentum & Low Volatility Rotation Portfolio ETF (NASDAQ:DWLV) that follows more-or-less same the investment objective and can give VMOT a run for its money.

Notably, VAMO and DWLV charge 59 and 52 bps in fees, respectively, both lower than the proposed VMOT. Investors should also note that while VAMO offers investors a stock-oriented portfolio, DWLV does it like the proposed fund and follows a fund-of-funds tactic.

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