ETF Talk

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.

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