Momentum weighting can be one facet of a strategic approach to growth investing, helping navigate the challenging decision of when to sell an investment position.
A methodology that includes momentum weighting might aim to address two key pitfalls common in growth investing. These pitfalls are selling winning positions too early and holding onto underperforming stocks for too long. Principally, momentum weighting serves as a key risk mitigation tool, according to Michael Mack, client portfolio manager for Victory Capital.
Momentum weighting can address these pitfalls by dynamically adjusting portfolio allocations based on the recent performance of individual stocks. This means an investor would hold onto stocks and only reduce their position when the upward trend reverses.
How Momentum Weighting Can Potentially Add Value
Investors may find it hard to resist sizing out of a position when a growth stock price quickly rises. However, premature selling may cause an investor to potentially miss out on additional long-term gains, if the company’s growth remains strong.
Momentum weighting helps counter this tendency by maintaining a larger allocation to stocks exhibiting strong upward price momentum, providing a data-driven rationale to stay invested as long as the positive trend persists. This potentially allows investors the opportunity to capture more of the upside during periods of growth.
Conversely, investors can sometimes hold on to a strongly performing growth stock for too long, even as growth begins to slow or underlying fundamentals deteriorate. This can potentially result in losses as the stock price eventually corrects and profits deteriorate. Momentum weighting acts as a disciplined mechanism to reduce exposure to declining stocks.
As a stock’s performance weakens relative to the broader market or its peers, the momentum-based strategy would decrease its weight in the portfolio. This helps preserve capital and potentially allows for reallocation to more promising opportunities.
The principles of momentum weighting are exemplified in the VictoryShares Free Cash Flow Growth ETF (GFLW ), which provides exposure to a portfolio of growth companies projected to compound free cash flow (FCF) over time.
GFLW Targets Growth & Profitability While Weighting by Momentum
GFLW tracks the Victory Free Cash Flow Growth Index (the Index), a rules-based index that is designed to offer access to 100 high-quality, large-cap U.S. companies. Companies are included based on high FCF profitability and strong growth potential. Importantly, the constituents are weighted by absolute momentum, which is the absolute value of the risk-adjusted, one-year return of the portfolio’s holdings.
While the Index does not screen stocks in or out of the portfolio based on absolute momentum, it plays an important role in how large or small a position will be of a company within the overall portfolio of 100 stocks.
VettaFi LLC (“VettaFi”) is the index provider for GFLW, for which it receives an index licensing fee. However, GFLW is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of GFLW.
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Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing.
All investing involves risk, including the potential loss of principal. Please note that the Fund is a new ETF with a limited history. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. ETFs may trade at a premium or discount to their net asset value. The Fund invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index.
Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruption. The Funds could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Funds’ shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
The Victory Free Cash Flow Growth Index measures the performance of profitable companies that generate high free cash flow from invested capital and display higher growth characteristics. The index is subject to sector and security weight constraints. The constituents are weighted by modified absolute momentum.
VictoryShares ETFs distributed by Victory Capital Services, Inc.
VettaFi LLC (“VettaFi”) is the index provider for GFLW, for which it receives an index licensing fee. However, GFLW is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of GFLW.
