Value and Momentum

Our clients do not have any positions in the securities discussed below; however, I do believe that ValueShares US Quantitative Value (“QVAL”) ETF and MomentumShares US Quantitative Momentum (“QMOM”) ETF are the two best ways to the capture the value premium and the momentum factor in the asset management business.

I offer two simple definitions for long-only momentum and value strategies.

For momentum or cross-sectional momentum strategies, buy the stocks that have the highest return over the past 3-12 months (depending on the period you are using) relative to other stocks.

Value needs no introduction.  The value strategy we are discussing has to do with buying the cheapest stocks in the market based on common fundamental price ratios (think Price to Cash Flow, Enterprise Value to Earnings Before Taxes and Interest)

I follow these two ETFs closely because it gives me an insight into how portfolios could be positioned if you are a value investor or a momentum investor.  What separates these two ETFs compared to other smart beta products out there is in the portfolio construction.  Other ETFs might be sector constrained, meaning they won’t have more than a certain % of the fund invested in one sector.  QVAL, on the other hand, is sector agnostic.  Also, QVAL and QMOM are more concentrated portfolios (typically 30 to 40 holdings).

Take a look at the sector analysis below.  Almost 30% of QVAL is currently invested in the retail sector, stocks such as Macy’s, GAP, and Urban Outfitters.  QMOM, however, has no exposure to brick and mortar retailers.   Who would want exposure to those companies when you can just buy Amazon?  Value is the pain and patience trade – why everyone is selling these stocks they become cheaper and cheaper relative to other stocks.  How many people are buying GE now?  Certainly not momentum investors.

QMOM has high weight towards Electronic Technology.  Remember, QMOM is buying stocks that enjoyed significant gains over the last year.  Autodesk is one of the holdings in QMOM.  Year over year, the price was up 75% up until yesterday, when it declined by about 15%.  It’s also not easy to buy high momentum names that are overvalued as well.  I for one have loved Netflix’s DVD and streaming service for a very long time; however, I have never bought the stock because it has always been overvalued and has been up huge.   It has been one of the best-returning stocks since 2007.

QVAL Sector Analysis

QVAL sector

QMOM Sector Analysis

QMOM sector

If you are running your own portfolio and your portfolio was clobbered yesterday, it is likely that the stocks you are invested are heavy tech, high growth, and/or have been experiencing above average price momentum.  On the other hand, if you saw your portfolio up over 1.00% yesterday it is likely that you have a value tilt in your portfolio.

The orange line below is for QMOM and the blue line is QVAL.  You can see the difference in return over the last month and the divergence that happened yesterday between the two strategies.

QVAL_QMOM_SPY_chart

Yesterday was a day that you might have looked at the headline indices (S&P and the Dow) a thought that you were flat or slightly positive.  It is also worth noting that the stocks that were down significantly yesterday are also the ones that have risen the most (like Facebook, Nvidia, and Square).  It should go without saying but please know what you own and why you own it.