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FDMO strategy
Fidelity Momentum Factor ETF (NYSEARCA:FDMO) started investing operations on 9/12/2016 and tracks the Fidelity U.S. Momentum Factor Index. It has 128 holdings, a distribution yield of 0.66% and an expense ratio of 0.15%.
As described by Fidelity, the underlying index selects stocks with high momentum characteristics among the largest 1000 U.S. stocks based on market cap. It excludes non-US companies, BDCs and limited partnerships. Four factors are taken into account with different weights to calculate the momentum score:
- 12-month Return Minus 1-month Return (35%).
- Volatility-adjusted 12-month Return Minus 1-month Return (35%).
- 12-month Earnings Surprise (15%).
- 12-month Average Short Interest (15%, lower is better).
The index is sector-neutral: sectors keep the same weights as in the parent index. The highest ranked stocks of each sector are selected in the index (the number of stocks depends on the sector). Within each sector, stocks are weighted based on their market cap weights. The index is rebalanced quarterly and the portfolio turnover rate in the most recent fiscal year was 137%.
FDMO portfolio
The portfolio is mostly invested in large and mega caps (about 72% of asset value). Therefore, this article will use as a benchmark the S&P 500 Index, represented by SPDR S&P 500 ETF Trust (SPY).
Technology is the heaviest sector by far (28.3% of asset value). Due to the sector-neutral methodology, the sector breakdown is very close to the benchmark.
Sector breakdown (chart: author; data: Fidelity, SSGA)
The portfolio is quite concentrated. The top 10 holdings, listed in the next table, represent 35.9% of asset value and the top 4 names are between 4% and 7%. Risks related to other individual companies are low.
Ticker | Name | Weight% | EPS growth %TTM | P/E TTM | P/E fwd | Yield% |
Microsoft Corp. | 6.69% | 25.11 | 35.24 | 34.47 | 0.74 | |
Apple, Inc. | 5.81% | 9.26 | 28.52 | 27.90 | 0.55 | |
NVIDIA Corp. | 5.37% | 585.45 | 74.38 | 35.05 | 0.02 | |
Alphabet, Inc. | 4.04% | 45.00 | 25.65 | 22.36 | 0.48 | |
Amazon.com, Inc. | 3.84% | 763.59 | 52.30 | 41.48 | 0 | |
Meta Platforms, Inc. | 2.29% | 115.95 | 25.96 | 22.40 | 0.44 | |
Eli Lilly & Co. | 2.19% | 7.89 | 110.07 | 54.81 | 0.71 | |
Berkshire Hathaway, Inc. | 2.03% | 528.99 | 9.06 | 21.91 | 0 | |
Broadcom Inc. | 1.91% | -8.30 | 47.38 | 27.03 | 1.64 | |
JPMorgan Chase & Co. | 1.72% | 22.15 | 11.50 | 11.74 | 2.41 |
Data: Portfolio123
Fundamentals
As reported in the next table, the fund is more expensive than the S&P 500 regarding valuation ratios. However, it is not very far from it. The aggregate price/sales is even marginally cheaper. The earnings growth and sales/growth rates are a bit higher, while cash flow growth is significantly superior.
FDMO | SPY | |
Price/Earnings TTM | 26.47 | 24.39 |
Price/Book | 5.82 | 4.26 |
Price/Sales | 2.61 | 2.79 |
Price/Cash Flow | 19.11 | 16.79 |
Earnings growth | 24.95% | 21.92% |
Sales growth | 9.69% | 8.79% |
Cash flow growth | 19.22% | 8.81% |
Performance
Since 10/1/2016 FDMO has lagged the S&P 500 by 88 bps in annualized return. Risk metrics (volatility and drawdown) are similar to the benchmark, as reported below.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
FDMO | 153.95% | 13.07% | -33.94% | 0.7 | 16.78% |
SPY | 169.50% | 13.95% | -33.72% | 0.77 | 16.48% |
Data: Portfolio123
However, FDMO is 6% ahead of SPY over the last 12 months:
FDMO vs. SPY, 12-month return (Seeking Alpha)
FDMO vs. competitors
The next table compares characteristics of FDMO and five other large cap momentum ETFs:
- Invesco S&P 500 Momentum ETF (SPMO)
- iShares MSCI USA Momentum Factor ETF (MTUM)
- Invesco Dorsey Wright Momentum ETF (PDP)
- JPMorgan U.S. Momentum Factor ETF (JMOM)
- Vanguard U.S. Momentum Factor ETF (VFMO)
FDMO | SPMO | MTUM | PDP | JMOM | VFMO | |
Inception | 9/12/2016 | 10/9/2015 | 4/16/2013 | 3/1/2007 | 11/8/2017 | 2/13/2018 |
Expense Ratio | 0.15% | 0.13% | 0.15% | 0.62% | 0.12% | 0.13% |
AUM | $193.16M | $1.17B | $9.68B | $1.20B | $872.92M | $534.36M |
Avg Daily Volume | $1.38M | $26.27M | $167.33M | $2.26M | $8.23M | $4.71M |
Number of Holdings | 128 | 102 | 128 | 103 | 280 | 594 |
Assets in Top 10 | 35.90% | 62.83% | 42.77% | 24.52% | 19.34% | 13.09% |
Turnover | 137.00% | 81.00% | 111.00% | 140.00% | 43.00% | 73.00% |
Data: Seeking Alpha
FDMO is the smallest fund of this group regarding assets under management, and the least liquid in dollar volume. The next chart plots total returns, starting on 2/19/2018 to match all inception dates. FDMO is in the middle of the pack and SPMO is ahead of the competition.
FDMO vs competitors, since 2/19/2018 (Seeking Alpha)
In fact, FDMO has consistently underperformed SPMO since its inception:
FDMO vs SPMO, since inception (Seeking Alpha)
Takeaway
Fidelity Momentum Factor ETF (FDMO) implements a sector-neutral strategy based on price performance, and to a lesser extent earnings surprise and short interest. It is overweight in technology and large companies. Although FDMO methodology looks more sophisticated than other momentum ETFs, its track record is disappointing. FDMO has underperformed the benchmark and the S&P 500 Momentum Index (represented here by SPMO, reviewed here), whose strategy is much simpler.
