Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some momentum stocks to your portfolio, but don't have the time or expertise to handpick a few, the iShares MSCI USA Momentum Factor ETF (MTUM 1.11%) could save you a lot of trouble. Instead of trying to figure out which momentum stocks will perform best, you can use this ETF to invest in lots of them simultaneously. It invests in mid-cap and large-cap stocks exhibiting momentum characteristics.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on momentum stocks, sports a very low expense ratio -- an annual fee -- of 0.15%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This momentum-stocks ETF is too young to have a track record worth assessing. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why momentum stocks?
If you like the idea of investing in stocks that have been appreciating because you think they're likely to keep doing so, then the momentum stocks selected for the MSCI USA Momentum Index and this corresponding ETF should be of interest. (Just know that no stocks keeps rising forever, or even in a straight line. It's smart to have a handle on your holdings' businesses, looking beyond just their stock price movements.)
More than a handful of momentum stocks had strong performances during the past year. Gilead Sciences, (GILD +1.06%), for example, surged 96%. Bulls are very excited about its recently approved oral hepatitis-C treatment, Sovaldi, with its reported cure rates near 90% in clinical trials. The company just posted strong fourth-quarter results, with revenue up 21% on strong new-product sales. Sovaldi is new to market, but has the potential to become a blockbuster, with sales exceeding $1 billion. Meanwhile, Gilead's HIV drug Stribild saw sales quintuple over the year-ago quarter.
priceline.com (PCLN +1.82%) popped 62%, with its price now above $1,100 per share. In its third quarter, both bookings and gross profit grew by more than 35% (year over year), and it's seeing more impulse buying via its mobile apps. Priceline.com has been growing in part via savvy acquisitions, such as Kayak.com, and with its Booking.com, Agoda.com, and rentalcars.com sites, it offers much more than flight bargains, such as hotel rooms, cruises, and rental cars. With a forward P/E ratio below 20, priceline.com stock seems to have more room to run. Its net margin was recently about 28%, and has been growing.
Walgreen (WAG +0.00%) gained 43% during the past year. Its dividend yields 2.3% and has been growing aggressively, with an average annual increase topping 20%.) Its last quarter was strong, but it hasn't been growing as briskly as CVS Caremark. Walgreen's pharmacy business is positioned to do well domestically and abroad, thanks to some savvy partnerships. With CVS Caremark recently announcing plans to stop selling cigarettes (and give up $2 billion in annual revenue), some wonder whether Walgreen will follow suit.
Other momentum stocks didn't do quite as well over the last year, but could see their fortunes change in the coming years. United Parcel Service (UPS 1.56%) advanced 19% and offers an appealing 2.6% dividend yield, too. UPS is poised to prosper as e-commerce grows, but this past holiday season proved to be a challenge due to high demand. United Parcel Service is pursuing new revenue sources, too, such as 3-D printing, which it will be offering in its stores. Its fourth quarter featured net income down 5% due to rising costs. Management expects earnings to grow by double digits in 2014.
The big picture
If you're interested in adding some momentum stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
