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Momentum ETFs & Stocks to Buy on Renewed Market Rally

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After dismal trading for more than a week, the U.S. stocks are showing strong rebound as China stimulus measures to support the coronavirus-affected economy revived investors’ risk appetite.

The People’s Bank of China has injected $1.7 trillion yuan ($242.9 billion) into the economy via reverse repos and unexpectedly lowered interest rates on reverse repurchase agreements by 10 basis points (bps).

Additionally, bouts of strong U.S. economic data and solid corporate earnings reports boosted investors’ confidence in the economy and the stock market. The U.S. manufacturing sector, which had languished in contraction territory for five months, has rebounded strongly with the Institute for Supply Management’s PMI rising to 50.9 in January from a December reading of 47.8. Services sector activity also picked up in January, with industries reporting increases in new orders, suggesting the economy could continue to grow moderately this year. New orders for U.S. manufactured goods also rose in December at the fastest pace in more than a year (read: U.S. Manufacturing Back to Health: ETF Winners & Losers).

Meanwhile, fourth-quarter results so far have been better than expected. Earnings for 70.3% of the S&P 500 market capitalization are up 0.4% year over year on 3.0% higher revenues, with 70.7% beating on earnings and 67.3% surpassing revenue estimates. While the proportion of companies beating earnings estimates is tracking below the same group of 266 index members a year ago, the revenue beat percentage is notably above historical periods.

Further, the progress on treatment against coronavirus, which has shaken the global economy and the stock market complacency, drove the stocks. Sky News reported that U.K. researchers have made progress in lab tests toward a vaccine for the virus that has been likened to SARS, or severe acute respiratory syndrome. A research team at Zhejiang University identified a cocktail of drugs, namely Abidol and Darunavir, which has far proven effective at stanching the virus in infected patients. A separate report from China’s media pointed to a combination of Lopinavir and Ritonavir as an effective treatment (read: China ETFs to Gain on New Stimuli to Combat Coronavirus).

Amid such backdrop, momentum investing would be a winning strategy for those seeking higher returns in a short spell. This is because the strategy seeks to capitalize on the continuance of an existing market trend. It looks to fetch profits from buying hot stocks that have shown an uptrend over the past few weeks or months.

As such, we have presented five ETFs and stocks that could lead to outperformance in the current market environment. Further, these could even beat broader market returns in the coming months if the trend prevails.

ETF Picks

iShares Edge 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 the popular choice with AUM of $10.2 billion.

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 $1.9 billion in its asset base and charges 62 bps in annual fees (read: 4 Sector ETFs That Hit All-Time Highs).

SPDR Russell 1000 Momentum Focus ETF ONEO

With AUM of $352 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. The fund has a Zacks ETF Rank #2 (Buy).

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 having the highest momentum scores. It has AUM of $702.6 million and charges 39 bps in annual fees. It has a Zacks ETF Rank #1 (Strong Buy).

Invesco DWA SmallCap Momentum ETF DWAS

With AUM of $252.3 million, this ETF offers exposure to the small-cap segment of the broad U.S. stock market with positive relative strength characteristics. It follows the Dorsey Wright SmallCap Technical Leaders Index, charging 60 bps in annual fees per year (read: Pick These US Small-Cap ETFs to Fight the Coronavirus Scare).

Stock Picks

Uber Technologies Inc. UBER

This California-based company develops and supports proprietary technology applications that aid independent providers in ridesharing, and meal preparation and delivery services to transact with end users, worldwide. The Zacks Consensus Estimate for 2020 loss of $2.37 has been narrowed from a loss of $2.45 over the past 30 days. The stock has a Zacks Rank #2 and Momentum Score of A.

PulteGroup Inc. PHM

This Atlanta-based company is engaged in homebuilding and financial services businesses, primarily in the United States. It witnessed solid earnings estimate revision of 21 cents over the past 30 days for this year. The stock has a Zacks Rank #1 (Strong Buy) and Momentum Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vertex Pharmaceuticals Incorporated VRTX

This Massachusetts-based company is focused on the discovery, development and commercialization of small molecule drugs targeting serious diseases. It saw solid earnings estimate revision of 89 cents for this year over the past 30 days. The stock has a Zacks Rank #2 and Momentum Score of A.

Western Digital Corporation WDC

This California-based company is one of the largest hard disk drive producers in the United States. It has seen positive earnings estimate revision of 68 cents for the fiscal year (ending June 2020) in a month. The stock has a Zacks Rank #1 and Momentum Score of A (read: 5 Red Hot Stocks That Drove Nasdaq ETF to New Highs).

Chipotle Mexican Grill Inc. (CMG - Free Report)

This California-based company operates Chipotle Mexican Grill restaurants. It has witnessed solid earnings estimate revision of 28 cents for this year in a month. The stock has a Zacks Rank #2 and Momentum Score of A.

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