Despite the economic calamity that was 2020, somehow $1.5 trillion in excess savings accumulated last year. We talked about it in our Your Money Matters installment yesterday and Ted wrote about it on Monday, explaining how some of that money found its way to the stock market via retail investors.
Unbeknownst to them, many of last year’s new market entrants were caught up in a popular quant strategy: momentum.
It’s as simple as it sounds.
Momentum strategies essentially buy what’s working and stay away from what isn’t. For example, a quant factor could rank stocks based on returns over a trailing 12-month period and buy the highest-rated companies.
In other words, momentum strategies tend to chase the market’s hottest stocks.
There are even exchange-traded funds (ETFs) that implement quant strategies, such as the iShares Edge MSCI USA Momentum Factor ETF (NYSE: MTUM).
Want to guess its No. 1 holding?
Tesla (Nasdaq: TSLA).
So don’t be fooled.
Its meteoric rise wasn’t just the work of retail investors bidding the price higher. Quant funds undoubtedly played a key role in the stock’s 743% surge in 2020 as well.
That’s why understanding the quant crowd and their factors can give you a key advantage to raking in profits.
Why Factors Work
The momentum factor is just one example of many, and quite often these factors work because of our own behavioral biases.
FOMO, or fear of missing out, goes a long way toward explaining why momentum works. Stocks in the midst of strong gains keep surging because greed drives more investors to pile into the shares.
There are hundreds of factors, spanning categories like quality, volatility and analyst revisions … each meticulously researched and proven by both academics and practitioners alike.
And there’s more than $1 trillion in assets being invested based on these factors.
So just as a particular stock is starting to rank well on a factor, the quant money comes piling in and pushes the share price higher.
How to Leverage Quant Strategies Into Big Profits
Quant strategies used to belong in the exclusive realm of secretive hedge funds that were only accessible by wealthy investors.
But now they’ve become more commonplace, which is a key element behind the surge in assets within these strategies.
In fact, there are a variety of low-cost ETFs where you can access factor investing, like I mentioned earlier.
But just like a stock, individual factors can be volatile.
So consider an ETF that combines multiple factors as a way to diversify your quant exposure … like with the Goldman Sachs ActiveBeta® U.S. Large Cap Equity ETF (NYSE: GSLC).
You can also try another approach…
I’ve worked on quant strategies for over a decade now, and I’ve designed my own innovative system that finds top-ranked stocks based on the same quant factors used up and down Wall Street.
And as a Chartered Market Technician, I also overlay my proprietary technical system to pinpoint the arrival of quant flows, and leverage options that turn nice gains into huge profits.
I’ll be sharing the details tomorrow, during an exclusive webinar. Access is limited so reserve your free spot right now, and then tune in tomorrow at 1 p.m. Eastern time.
Research Analyst, The Bauman Letter