The U.S. stock market saw the worst week since mid-November with the Dow Jones logging in its third straight week of decline. The S&P 500 dropped for the second consecutive week and the Nasdaq Composite Index snapped a four-week winning streak. The Dow Jones fell 2.3% this week, while the S&P 500 and Nasdaq declined 2% and 1.8%, respectively.
The Fed shook the stock market last week after it scaled back expectations for a rate cut. The Fed envisions only two rate cuts in 2025, in contrast to four projected in September, given a solid labor market and sticky inflation (read: Wall Street Dives on Less Dovish Fed: 5 ETF Zones That Win).
However, investors are bracing for a Santa Claus rally as the holidays have arrived. A Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e., between Christmas and New Year’s Day) that extends into the first two days of the New Year. Notably, high-beta and high-momentum products are expected to outperform in the seven-day period and are intriguing choices for a short spell.
These include Invesco S&P 500 High Beta ETF SPHB, iShares MSCI USA Momentum Factor ETF MTUM, Invesco S&P MidCap Momentum ETF XMMO, Invesco S&P 500 Momentum ETF SPMO and Invesco S&P SmallCap Momentum ETF XSMO.
High-beta ETFs experience larger gains than their broader market counterparts in a bullish market while momentum investing looks to capture profits from buying hot stocks, which have shown an uptrend over a few weeks or months.
Santa is Arriving!
The year-end seasonal factors such as holiday optimism, tax-related affairs, investment of Christmas bonuses, mutual fund manager window dressing and the “January effect” will drive stocks higher (read: Unwrapping 5 ETF Surprises From Secret Santa for Christmas).
The U.S. economy has been expanding with rising consumer confidence and higher spending power. Economic output increased to the highest level in nearly three years this December. S&P Global's flash U.S. composite PMI, which captures activity in both the services and manufacturing sectors, came in at 56.6 in December, up from 54.9 in August. Retail sales rose faster than expected in November, reflecting continued resilience in consumer spending and strong economic momentum. U.S. consumer sentiment increased for the fifth month in December. The sentiment index, according to the University of Michigan, increased to 74 in December from 71.8 last month.
Further, Trump’s pro-growth and pro-deregulation policies are expected to propel economic growth. Though the Fed is cautious about future rate cuts, it has slashed interest rates for the third time in the past three months, bringing down the benchmark rate to 4.25-4.50%. Lower interest rates generally lead to reduced borrowing costs that help businesses expand their operations more easily and increase profitability.
ETFs to Tap
Invesco S&P 500 High Beta ETF (SPHB)
Invesco S&P 500 High Beta ETF tracks the performance of 100 stocks from the S&P 500 Index with the highest beta over the past 12 months. It is widely spread out across each security as none of them holds more than 3.2% of total assets. About 51.2% of the portfolio is allotted to information technology while consumer discretionary and industrials round off the next two spots with a double-digit allocation each.
Invesco S&P 500 High Beta ETF has amassed $386 million in its asset base and charges 0.25% in expense ratio. The ETF trades in an average daily volume of 187,000 shares.
iShares MSCI USA Momentum Factor ETF (MTUM)
iShares MSCI USA Momentum Factor ETF follows the MSCI USA Momentum SR Variant Index, holding 124 stocks and exhibiting a relatively higher price momentum. It is pretty well spread out across components, with none holding more than 6.4% of assets. iShares MSCI USA Momentum Factor ETF is skewed toward the information technology sector at 24.9% while financials, consumer staples and industrials round off the next three positions.
iShares MSCI USA Momentum Factor ETF has accumulated $13.2 billion in its asset base and trades in a solid volume of about 1 million shares a day and charges 15 bps in fees per year.
Invesco S&P MidCap Momentum ETF (XMMO)
Invesco S&P MidCap Momentum ETF follows the S&P Midcap 400 Momentum Index, which is designed to identify mid-cap firms having the highest momentum scores. It holds 77 stocks in its basket, with key holdings in industrials, financials and consumer discretionary (read: 5 ETFs That Deserve Special Thanks in 2024).
Invesco S&P MidCap Momentum ETF has AUM of $4.1 billion and charges 39 bps in annual fees. It trades in an average daily volume of 456,000 shares and has a Zacks ETF Rank #2 (Buy).
Invesco S&P 500 Momentum ETF (SPMO)
Invesco S&P 500 Momentum ETF tracks the S&P 500 Momentum Index, which measures the performance of stocks in the S&P 500 index that have a high "momentum score.” It holds 100 securities in its basket and charges 13 bps in fees per year. Financials is the top sector with a 23.4% share, while information technology, consumer discretionary, and industrials round off the next three spots.
Invesco S&P 500 Momentum ETF has an AUM of $3.7 billion and trades in an average daily volume of 905,000 shares.
Invesco S&P SmallCap Momentum ETF (XSMO)
Invesco S&P SmallCap Momentum ETF offers exposure to companies in the S&P SmallCap 600 Index having the highest “momentum scores.” It tracks the S&P Smallcap 600 Momentum Index, holding 114 stocks in its basket.
Invesco S&P SmallCap Momentum ETF has gathered $1.4 billion in its asset base and charges 39 bps in annual fees. The fund trades in an average daily volume of 391,000 shares.
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