By scouring the universe of stocks listed in Bursa Malaysia, the smart beta factor applies a screening filter to select companies which exhibit the highest price momentum. This involves measuring the relative strength reading of the stock by calculating the ratio of the closing price of each stock to the closing price of the benchmark on a daily basis.
Each of this company is then assigned a momentum score, where they are then ranked and weighted equally in a customised index. Only 20 stocks with the highest momentum scores are then included as component companies of the index.
To derive momentum, the smart beta factor focuses on prevailing price movements and ignores insignificant movements such as small price fluctuations, timing factors as well as trading volumes. This ensures that the Fund only select companies that truly demonstrate relative strength characteristics.
Some investors may be cautious about entering the market when it is trending upwards, but sometimes it is better not to go against the market's direction and just ride its momentum. As aptly put by astute investor, George Soros, "It does not follow that one should always go against the prevailing trend. Most of the time we are punished if we go against the trend."
The Malaysia Momentum Tracker provides investors a momentum strategy focused on the performance of the domestic market through local companies that many are already familiar with.
Through extensive back-testing, this strategy has shown a strong historical trend by vaulting higher than the broader market and amplifying returns in a portfolio.
This can be seen in 2017 when markets were buoyed by synchronised global growth underpinned by a Goldilocks environment, where the Dorsey Wright Technical Leaders Malaysia Index leaped 51.9% compared to the benchmark FBM KLCI that rose 9.5%.
In 2014 and 2015, the Malaysia Momentum ETF even bucked the broader market direction and posted positive returns even though the benchmark KLCI closed in the red. This can be attributed to the smart beta factor which sidesteps the market-cap value of the stocks and instead invest in stocks based on its momentum attribute
A New Way to Invest in Malaysia
With the Tradeplus DWA Malaysia Momentum Tracker, investors can position themselves to ride along with the recovery of the domestic market. By investing in stocks with the highest price momentum, investors would be able to gain exposure to companies that would truly reflect the recovery of the domestic economy. While the broader market direction has been somewhat lacklustre with mounting pressures from both internal and external forces, the strategy aims to sniff out opportunities using the momentum factor tilt to find trends and capitalise on them.
It may even be an opportune time for investors to gradually build their exposure into equities through a momentum strategy, as valuations have turned attractive following the indiscriminate sell-down of local stocks in Bursa Malaysia post COVID-19. The strategy has historically done well and performed even better during improving / recovery periods. Coupled with its low-cost attractiveness as an ETF, the Malaysia Momentum Tracker also provides investors the opportunity to capitalise on the movement of 20 stocks at a fraction of owning the full 20 names if they were to trade them on their own.
