Exchange Traded Funds (ETFs)

Applying Newton’s First Law of Motion to an ETF

The Fidelity Momentum Factor ETF (FDMO) is a U.S.-stock-based exchange-traded fund (ETF) that tracks large- and mid-cap companies which have been performing well recently.

As the great Sir Isaac Newton once famously stated as his first law of motion, “an object in motion will stay in motion.” If this statement is applied to investing, and FDMO specifically, one could say that the ETF’s management bases its investments on the theory that a stock in motion tends to stay in motion.

Momentum investing, according to academics, is one of the few broad general strategies that truly seems to beat the market over time, taking the entire of history of the market into account. What is not clear, however, is whether this theory still holds in the modern market environment.

As this information has become fairly well known in recent years, it may already be priced into markets. The long-term results of momentum investing could be due to underlying strength in companies, investor psychological factors, both of these, or something else entirely.

FDMO invests in big, household names that “exhibit positive momentum signals.” Additionally, as befits its overall investment strategy, the fund’s sector allocations closely align with recent top-performing segments. For example, FDMO’s two biggest sectors by allocation are information technology (25.41%) and financials (14.20%), which, according to Fidelity, are two of the best-performing sectors over the last year.

This year, FDMO has returned 2.43%. Over the last 12 months, though, the return was a more impressive 17.12%. The expense ratio of 0.29% is reasonable and the fund pays a modest yield of 1.13%. Assets total about $75 million, which puts the fund on the small side.

Chart courtesy of Stockcharts.com

Top holdings for FDMO include Apple Inc. (AAPL), 4.03%; Microsoft Corp. (MSFT), 3.54%; Amazon.com Inc. (AMZN), 3.09%; Facebook Inc. (FB), 2.29%; and JPMorgan Chase & CO. (JPM), 2.09%. Plus, 24.14% of FDMO’s assets are invested in its top 10 holdings.

If you believe that investments that have gone up recently will continue to go rise, the Fidelity Momentum Factor ETF (FDMO) has an investment strategy that may align with your investing philosophy.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.