Stick With High Quality Over Momentum Funds

By Max Chen, ETF Trends

Despite a short rebound last week, momentum stocks and related sector exchange traded funds may not regain their previous highs any time soon. However, some higher quality momentum stocks can still hold their ground, Goldman Sachs says.

David Kostin, Goldman’s chief U.S. stocks strategist, said that clients have become more optimistic about a “re-momentum” trade but warns against being overly optimistic, reports Alexandra Scaggs for the Wall Street Journal.

Specifically, Kostin points out that high-flying stocks have only recovered in the six months after a major sell-off 40% of the time since 1980. Additionally, a number of outside factors have supported the stocks when they did make the recovery.

Higher quality picks, companies with high margins, strong balance sheets and high return on capital, have fallen behind last year’s high flyers. Now, Kostin argues that these higher quality momentum stocks offer above-average prospects for growth and are cheaper than their sector peers.

For instance, larger quality names like Google (GOOG) and Microsoft (MSFT). Momentum tech stocks and funds have clearly been taken to task, but while that has been happening, funds with heavy exposure to older, more traditional tech companies have remained firm.

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First Trust NASDAQ Technology Dividend Index Fund (TDIV) (see above) is a component of the D2 Capital Management Multi-Asset Income Portfolio.  Current dividend yield of the portfolio is 5.43% (as of 28 April 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

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