Market Rebounds: Time For Momentum ETFs & Stocks?

After two-days of equity market rout, the global market has finally taken a breather. Heavy sell-offs triggered by Brexit – which in fact can be tagged as the worst global equity loss superseding the market crash in September 2008 on the fall of Lehman Brothers – now seem to have eased.

All three key U.S. indices are in the red with the big three funds, (AX:SPY) , (V:DIA) and QQQ adding 1.8%, over 1.5% and about 2.2%, respectively on June 28, 2016. Even the epicenter of the crisis, Europe, staged a rally with Vanguard FTSE Europe ETF VGK inching higher about 3.3%.

One of the most thrashed in the immediate aftershock of the Brexit vote – iShares MSCI Italy Capped (LON:EWI) – also added about 3.5% on June 28. And last but not the least, the in-focus ETF iShares MSCI United Kingdom EWU jumped about 4.3% on June 28 while the downtrodden currency ETF CurrencyShares British Pound Sterling ETF (NYSE:FXB) FXB added over 1%.

Bargain hunting looks to be the main reason for the recent spurt. While we do not believe these bounces have legs, investor sentiments about risky investments were relatively relaxed because of compelling valuation.

Forget Brexit; Look at Revised U.S. GDP

The third and final revision to Q1 GDP for the U.S. underwent an upward revision, from 0.8% in the second reading to 1.1%. This should pacify investors who started to lose hopes on domestic economy after the shockingly downbeat May job data. For Q2 GDP, analysts are expecting a recoil of around 2.5%.

How About Momentum Plays?

While these figures only give you a direction of where the domestic economy is headed, investors should note that the global market will remain rocky as the separation of Britain from the European Union (EU) proceeds. Thus, momentum investing might be an intriguing idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks which are sizzling on the market.

This is especially true for the U.S. market as the Fed will now be dovish in the coming few months and be busy analyzing how negative the impact of Brexit could be on the domestic economy. The confirmation of a few more months of cheap money inflows translates into a beneficial backdrop for the U.S. equities.

Below we highlight three momentum stocks and ETFs which may find a place in investors’ wish list (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).

iShares MSCI USA Momentum Factor ETF MTUM

This ETF seeks to track the performance of large- and mid-cap U.S. stocks exhibiting relatively higher momentum characteristics. The fund has attracted about $1.36 billion is assets so far. With an expense ratio of just 15 basis points, this is one of the cheapest options in the high momentum ETFs space.

The ETF has double-digit exposure to IT, consumer discretionary, consumer staples, health care, utilities and industrials. AT&T (NYSE:T) is currently the top holding of the fund. MTUM was up over 1.2% on June 28 and the product has added about 1.6% so far this year (as of June 28, 2016).

First Trust Dorsey Wright Focus 5 ETF (V:FV)

This ETF hovers around technical indicators such as relative strength. The fund is designed to indentify the five First Trust sector and industry-based ETFs that are arguably expected to have the maximum chance of outperforming the other ETFs in the selection universe. Securities with high relative strength scores (strong momentum) are given higher weights (read: 5 ETFs for a Retirement Portfolio).

Currently, the fund has the highest exposure to the ETF following the Utilities, Internet Consumer Staples. The fund has already managed to attract more than $4.57 billion in assets. It is a slightly expensive choice thanks to its “enhanced indexing” approach, with an expense ratio of 89 basis points. The fund was up over 1.8% on June 28 but has lost about 7.8% in the year-to-date frame (as of June 28, 2016).

Cambria Global Momentum ETF (GMOM)

Since the entire global market bounced back on June 28, a look at the global momentum ETF seems warranted. This active ETF seeks to preserve and enhance capital from investments in the U.S. and foreign equity, fixed income, commodity and currency markets, independent of market direction (read: International Treasury ETFs: Winners Amid Gloom).

The fund charges 95 bps in fees. The fund has added 2.1% so far this year while it added about 1% on June 28, 2016.

Stock Picks

We have chosen the top picks using the Zacks Screener that fits our criteria of a momentum score of ‘A’ and a Zacks Rank #1 (Strong Buy). Here are the three recommended stocks.

Dave & Buster's Entertainment Inc. (NASDAQ:PLAY)

This owner and operator of entertainment and dining venues has delivered an average positive earnings surprise of 104.8% over the trailing four quarters. Along with a Momentum score of ‘A’, the stock also has a Growth score of ‘A’. The stock added about 0.8% on June 28, 2016 and has returned over 8.8% in the year-to-date frame (as of June 28, 2016).

Harsco Corporation (NYSE:HSC)

The industrial services and engineered products provider has delivered an average positive earnings surprise of 80.9% over the trailing four quarters. It is a great value pick too with an ‘A’ score. The stock currently has a solid Zacks Industry Rank in the top 13%. It added over 6.1% on June 28, 2016, but is down 21.1% so far this year (as of June 28, 2016).