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Here's Why it Makes Sense to Invest in Momentum ETFs Now

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The S&P 500 index rally is largely reflective of investor optimism and improving U.S. economic fundamentals. The broader S&P 500 has so far gained 50.1% since it touched the lows in March (as of Aug 13). According to the Dow Jones Market Data, it also witnessed the best 100-trading-day gain since 1933. In fact, the index which has been recently near its Feb 19 all-time closing high of 3,386.15, is expected to set a new record soon.

Overall, the second-quarter earnings season has impressed investors as companies could fight the pandemic and deliver better results than feared by market participants. Of the 91% S&P companies that have reported, 79.6% beat on the bottom line while 62.6% surpassed revenue estimates. For these companies, earnings grew 35.5% and revenues were up 11.3% year over year, per the Earnings Trends report issued on Aug 12.

The improving manufacturing numbers have instilled optimism among investors. The U.S. ISM Manufacturing PMI came in at 54.2 for July 2020, up from 52.6 in the previous month and beat market expectations of 53.6. That is the highest reading since March 2019 as manufacturing activity is recovering after the pandemic-induced turbulence. A reading above 50 indicates expansion in manufacturing, which makes up about 11% of the U.S. economy, per a Reuters article. Also, the U.S. economy has started to reopen in phases and there is massive Fed and government stimulus to combat the crisis which can help the economy rebound.

After being hit by the coronavirus pandemic, the housing market has shown a strong rebound, largely due to low mortgage rates and higher demand for new homes. Notably, the S&P Homebuilders Select Industry Index reached a record high for the first time in 15 years, having gained 13.2% this year and more than doubling from the low reached in late March.

As the number of coronavirus cases continues to rise, all eyes are on developments in vaccine and treatments. Favorable updates on two vaccine candidates being made by Moderna (MRNA) and Pfizer (PFE) in collaboration with German biotech firm BioNTech came to the fore. These companies began the late-stage study on their coronavirus vaccines. Other vaccine developers that are being supported by the Operation Warp Speed are also nearing the late-stage trials. 

Also, the U.S. government has signed a $1.5-billion coronavirus vaccine supply agreement with Moderna. The contract has been entered into for the manufacturing and delivery of initial 100 million doses of its potential coronavirus vaccine, mRNA-1273, with the price coming in at nearly $30.50 per person for a two dose course of treatment (per a Reuters article). The U.S. government has been entering into such deals under its Operation Warp Speed program to purchase hundreds of millions of doses of potential coronavirus vaccines from several companies, according to The Economic Times article. The United States has entered into advanced purchase agreements for potential coronavirus vaccine candidates with Johnson & Johnson (JNJ), AstraZeneca Plc (AZN), Pfizer Inc (PFE) and BioNTech, and Sanofi and GlaxoSmithKline (GSK).

There is some good news coming from the jobs market as well. Per the Labor Department, the initial U.S. weekly jobless claims have declined to 963,000 in comparison to Dow Jones estimate of 1.1 million (according to a CNBC article). Moreover, it was the first time that jobless claims were below 1 million since March, per a CNBC article.

Going on, investors are continuously eyeing new stimulus talks and waiting for the new coronavirus relief package. The new stimulus package is expected to expand the jobless bonus to $400 per week, provide a payroll tax holiday for Americans making below $100,000 per year and defer student loan payments this year.

Momentum ETFs in Focus

While the broader stock market is expected to gain on optimism surrounding the reopening of U.S. economy and positive developments in coronavirus vaccine research, momentum investing will likely take center stage as investors seek greater returns in the short term. 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 Edge MSCI USA Momentum Factor ETF (MTUM - Free Report)

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 $11.17 billion (read: 2 New Factor-Based ETFs to Endure the Current Volatile Market).

Invesco DWA Momentum ETF (PDP - Free Report)

This fund tracks the Dorsey Wright Technical Leaders Index, which measures the performance of companies that demonstrate powerful relative strength characteristics. It has amassed $1.58 billion in its asset base and charges 62 bps in annual fees.

Invesco S&P MidCap Momentum ETF (XMMO - Free Report)

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 $703.5 million and an expense ratio of 0.39% (read: High Momentum ETFs to Tap Now).

VictoryShares USAA MSCI USA Value Momentum ETF (ULVM - Free Report)

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 $486.1 million in AUM and charges 0.20% in expense ratio.

SPDR Russell 1000 Momentum Focus ETF (ONEO - Free Report)

With AUM of $339.8 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.

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