Alpha Architect rolls out ‘quality’ momentum smart beta ETF

Dec 3rd, 2015 | By | Category: Equities

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Alpha Architect, an investment firm and exchange-traded fund designer, has launched a US equity ETF providing exposure to stocks with high quality momentum characteristics in an attempt to generate market beating returns.

Alpha Architect rolls out 'quality' momentum smart beta ETF

By looking quantitatively at the characteristics of momentum Alpha Architect aim to deliver more value to the investor.

According to the firm, the ETF sets out to improve upon traditional momentum-based smart beta  ETF strategies. “We believe our edge is robust: we design systematic investment programs that seek to exploit mispricing caused by irrational investors,” said Founder and CIO, Wesley R. Gray, Ph.D. “We invest the majority of our resources in research and development, with a focus on understanding how investor psychology affects stock prices. QMOM seeks to exploit the so-called momentum anomaly in a systematic, high-conviction, tax-efficient, and affordable way.”

The MomentumShares US Quantitative Momentum ETF (QMOM) invests in a concentrated list of approximately 50 US equities which, in addition to exhibiting simple momentum characteristics (i.e. historical 12-month positive returns), looks at the quality of this momentum by focusing on stocks with a smoother return path and by assessing the “seasonality” of momentum in the timing of rebalances.

Commenting on why the ETF was designed to be concentrated and highly active, Dr. Gray said: “We could have gone the ‘Smart Beta’ route and built a closet-index strategy that holds 100, 200, or more stocks. However, investors are paying us to take active bets; they are not paying us to deliver what is effectively a Vanguard S&P 500 ETF with a small tilt towards some factor.”

Dr. Gray and Dr. Vogel, co-CIOs of Alpha Architect, started developing their momentum algorithm soon after they completed development on their Quantitative Value algorithm in 2012. The philosophy underlying the Quantitative Momentum algorithm will be published in late 2016.

The ETF  joins a small number of concentrated, active, and momentum-based ETFs currently in the marketplace and may invest in securities of companies in any industry and with any market capitalization. As such the product may be best suited to a core-satellite investment approach where low-cost index tracking funds are paired with concentrated, factor-based ETFs in an effort to boost risk-adjusted returns at a reasonable total cost.

Listed on BATS, the MomentumShares US Quantitative Momentum ETF carries a 0.79% expense ratio, positioning it towards the higher end of the ETF fee scale and at a premium to competitors’ products such as the iShares MSCI USA Momentum Factor ETF (MTUM) which carries a much smaller 0.15% expense ratio.

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