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3 Momentum Stocks And ETFs To Play

After over a month-long storm, the global market has finally taken a breather. Heavy sell-offs triggered by the Chinese market slowdown, global growth issues and a steep plunge in oil prices now appear overdone. The factors – mainly oil and China – for which the market went into a tailspin, brought the recent relief. The Chinese central bank let the value of the yuan rise sharply against the U.S. dollar on Monday, when the biggest one-day jump in the currency was seen in almost a decade. The move finally prevented long-standing high-level talks about a meaningful deceleration in yuan. On the other hand, developments were positive in the oil patch, with prices soaring as the market mulled over the possibilities of a deal to limit supplies later in the year. Also, stimulus hopes in Japan and Europe to boost waning economies charged up the market. Back home, retail sales for January came in at the stronger side. Retail sales gained 0.2% in January – higher than the consensus estimate of a 0.1% increase. All these developments have brought back the risk-on trade sentiments – which were long missing – in the market. Among the top U.S. ETFs, investors saw the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) add 1.7%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) advance 1.4% and the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) move higher by about 2.3% on February 16. Not only the U.S. market, the all world ETF iShares MSCI ACWI Index (NASDAQ: ACWI ) was up 2%, the iShares Asia 50 ETF (NYSEARCA: AIA ) jumped 2.8%, the China ETF iShares China Large-Cap (NYSEARCA: FXI ) advanced 4.2%, the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) moved higher by 1.7% and the iShares MSCI Japan ETF (NYSEARCA: EWJ ) climbed 3.7%. While we do not believe these bounces have legs, investors’ sentiments about risky investments became relatively relaxed lately especially because of compelling valuation. Thus, momentum investing might be an intriguing idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks which are sizzling on the market. Below, we highlight three momentum stocks and three ETFs that may find a place in investors’ wish list. Stock Picks For stocks, we have chosen top picks using the Zacks Screener that fits our criteria of a momentum score of “A”, stock Zacks Rank #1 (Strong Buy) and positive estimate revisions for the current quarter. Here are the three recommended stocks. Delta Apparel Inc. (NYSEMKT: DLA ) Based in South Carolina, this retailer of apparel has delivered an average positive earnings surprise of 36.36% over the trailing four quarters. The consensus estimate for the current quarter has risen from $0.07 to $0.33 per share in the last 30 days, as one analyst raised the forecast, while none cut the estimate. Along with a Momentum score of “A”, the stock also has a Value score of “A”. This Zacks Rank #1 stock is up 13.8% so far this year (as of February 16, 2016). OraSure Technologies Inc. (NASDAQ: OSUR ) The company makes and markets oral fluid diagnostic products and specimen collection devices in the United States, Europe and internationally. OSUR is down 1.1% so far this year. The stock currently has a solid Zacks Industry Rank in the top 18%. It also has a Growth score of ‘A”. The consensus estimate for the current quarter has risen from breakeven to $0.01 per share. It has delivered an average positive earnings surprise of 216.7% over the trailing four quarters Tyson Foods Inc. (NYSE: TSN ) Based in Arkansas, Tyson Foods, together with its subsidiaries, operates as a food company worldwide. The stock currently has a Growth score of “A”, a Value score of “B” and a solid Zacks Industry Rank in the top 1%. In the last 30 days, its projection of earnings increased from $0.86 to $0.93. While one analyst raised the estimate, another cut it in the last 30-day frame. This high-momentum stock is up 16% so far this year (as of February 16, 2016). ETF Picks iShares MSCI International Developed Momentum Factor ETF (NYSEARCA: IMTM ) The $11-12 million fund looks to track the performance of large- and mid-capitalization developed international stocks exhibiting relatively higher momentum characteristics. The product charges 30 bps in fees and yields 1.73% annually. No stock accounts for more than 2.41% of the basket. The fund has a diversified double-digit exposure in the Consumer Staples, Discretionary, Financials, Industrials and Healthcare sectors. The product is heavy on Japan (32.23%), while Germany and U.K. also have solid exposure of 11.33% and 10.07%, respectively. IMTM is down 6.8% so far this year, but added 3.4% on February 16, 2016. The fund has a Zacks ETF Rank #3 (Hold). iShares S&P 500 Momentum Portfolio ETF (NYSEARCA: SPMO ) The $2.4-million fund tracks the performance of stocks in the S&P 500 Index that have a high momentum score. The fund charges 25 bps in fees and is heavy on Consumer Discretionary (31.9%) and Healthcare (27.5%). Consumer Staples and IT also have double-digit exposure. SPMO is down 7% year to date, but added over 2.2% on February 16, 2016. Cambria Global Momentum ETF (NYSEARCA: GMOM ) This active ETF seeks to preserve and grow capital from investments in the U.S. and foreign equity, fixed income, commodity and currency markets, independent of market direction. The bond fund iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) holds the top position with 11.73%, followed by other U.S. Treasury funds, namely the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) and the iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) in the next two spots. The fund charges 94 bps in fees and yields 1.91% annually. Equity ETFs also get a place in the fund. The fund has lost just 1.7% so far this year, while it added 0.2% on February 16, 2016. This could be a great pick in the bear market as well. Original Post

How Long Will You Wait For Smart Beta To Work?

In my last post I shared some insights from Ben Carlson’s A Wealth of Common Sense , which argues that investors are generally better off keeping their portfolios simple and straightforward. This idea has little appeal for index investors who hope to improve on plain-vanilla funds by using so-called smart beta strategies. “Smart beta” refers to any rules-based strategy that attempts to outperform traditional cap-weighted index funds. Now more than a decade old, fundamental indexing is the granddaddy of smart beta, while factor-based strategies are the newer kids on the block. In each case, the goal is to build a diversified fund that gives more weight to stocks with certain characteristics (value, small-cap, momentum, and so on) that have delivered higher returns than the broad market over the long term. Many proponents of passive investing see huge potential in factor-based strategies because they combine the best features of indexing-low-cost, broad diversification, and a rules-based process-with the potential to overcome the shortcomings of traditional cap-weighting. Indeed, many of our clients at PWL Capital use a combination of traditional ETFs and equity funds from Dimensional Fund Advisors (DFA) , which have greater exposure to the small-cap, value and profitability factors . The academic research on factor-based investing is robust and convincing, and building your portfolio using these principles may be rewarding over the long term. Ben Carlson thinks so, too, despite the emphasis he puts on simplicity. But he has some cautionary words for those who are ready to jump on the smart beta bandwagon. “I think these strategies can make sense as part of a broadly diversified portfolio if you know what you’re getting yourself into,” he writes. A costlier, bumpier ride Let’s start with the most obvious caveat: smart beta is cheap compared with active strategies, but it’s significantly more costly then traditional ETFs. Cap-weighted ETFs carry almost negligible costs these days, with fees as low as 0.05%, while factor-based funds tend to have MERs in the range of 0.40% to 0.80%. That means they need to deliver significant outperformance before fees to simply break even on an after-cost basis. Second, any outperformance is probably going to involve a rockier ride. While it’s not true over every period, small-cap and value stocks are typically more volatile than the broad market, so their excess returns may require you to endure more swings in your portfolio. Over the last five years, for example, that standard deviation (a measure of volatility) for both value and small cap stocks was higher than that of the broad market in Canada, the U.S. and international markets. And as Carlson notes: “One of my common sense rules of thumb states that as the expected returns and volatility of an investment increase, so too does poor behavior.” Which brings us to the biggest challenge for investors who use smart beta strategies. The waiting is the hardest part Investors who embrace smart strategies are usually familiar with the research showing that small-cap and value stocks have outperformed over the very long term in almost every region. But few appreciate that to those premiums can take a long time to show up-and were not talking about a mere five or 10 years. In his book, Carlson explains that from 1930 to 2013, small-cap value stocks in the US delivered an annualized return of 14.4%, compared with 9.7% for large caps. However, small-cap value lagged the S&P 500 for a 15-year stretch in the 1950s and 1960s, then for seven more years from 1969 to 1976, and finally for a gruelling string of 18 years in the 1980s and 1990s. “Eventually they paid off, but that’s a long time for investors to wait. Patience is a prerequisite for these strategies.” That’s an understatement. It’s not uncommon for investors to lose faith in a strategy after a year or two. It’s hard to imagine many will hang on to an underperforming smart beta fund as it lags the market for even five years-let alone 18-because they’re confident it will outperform over a lifetime. Almost no one has that kind of patience-with the possible exception of Leafs fans . “You have to commit to these types of strategies, not use them when they feel comfortable,” Carlson says. “The reason certain strategies work over the long term is because sometimes they don’t work over the short to intermediate term.” Tracking error regret Just this week, Larry Swedroe expanded on this idea by looking at the probability that the small and value premiums will be negative over various periods. He demonstrates that there’s a significant chance of underperformance over even a decade or two. “My almost 20 years of experience as a financial advisor has taught me that even the most disciplined investors can have their patience sorely tested by as little as even a few years of underperformance,” he confirms, “let alone a 10-year period without higher returns for value (or small, or international, or emerging market) stocks.” Swedroe goes on to coin a brilliant term for the anxiety indexers feel when their smart beta strategies go awry: tracking error regret . “These are investors who regret their decision to maintain a portfolio that performs differently than the market. Tracking error regret causes many investors to abandon their well-thought-out, long-term plans.” The point here is not that you should ignore alternatives to portfolios built from traditional index funds. Smart beta strategies may indeed reward the patient, disciplined investor over the very long term. But no investors should ever feel they’re settling for second-best with a simple solution. In the end, these traditionalists will likely find it easier to stay on course, and may just end up looking like the smart ones.