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Wall Street has been on a tumultuous ride ahead of Christmas as recession fears triggered by the re-emergence of the Fed’s hawkish tone led to risk-off trading. The weak result from the Micron Technology (MU - Free Report) and Tesla (TSLA - Free Report) sell-off added to the chaos. The weak trend might reverse at the end of the year, given that there is still hope for a Santa Claus Rally that would provide a boost to stocks.

With the Santa Claus Rally, most of the ETFs will likely see a nice boost. Notably, high-momentum products are expected to outperform in the seven-day period and are intriguing choices for a short spell. These include iShares MSCI USA Momentum Factor ETF (MTUM - Free Report), Invesco DWA Momentum ETF (PDP - Free Report), Invesco S&P MidCap Momentum ETF (XMMO - Free Report), Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) and SPDR Russell 1000 Momentum Focus ETF (ONEO - Free Report).

The strategy seeks to capitalize on the continuance of an existing market trend. It looks to fetch profits from buying hot stocks that have shown an uptrend over the past few weeks or months.

Santa On the Way?

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. Research in the Journal of Financial Planning found U.S. stocks have historically outperformed between Christmas and New Year, on average, offering a return of around 1% for the final five trading days of the year and the first two trading days of January.

This is because year-end seasonal factors such as holiday optimism, tax-related affairs, investment of Christmas bonuses, mutual fund manager window dressing, and the “January effect” drive the stock north.

Good tidings have started to flow in, with consumer confidence bouncing back in December to the highest level since April following back-to-back monthly declines, as high inflation continued to ease and gasoline prices dropped. This suggests that Santa might be on the way.

Additionally, inflation in the United States is cooling down gradually, underscoring that the worst of inflation has likely passed and the economy will be back on track sooner than expected. This is especially true as the consumer price index jumped 7.1% year over year in November, down from a 7.7% year-over-year increase in October and a recent peak of 9.1% in June. This represents the lowest annual increase since late 2021.

The November jobs report and producer price report came in better than expected. The economy added 263,000 jobs in November, marking another strong month of jobs growth. The unemployment rate remained at 3.7%, close to a 50-year low, while average hourly earnings jumped 0.6% from the prior month and 5.1% from the year-ago month. The producer price index climbed 0.3% for the third month and was up 7.4% from a year ago. Meanwhile, business activity jumped the most since March 2021 in November, suggesting that the largest part of the economy remains resilient. ISM’s gauge of services rose to 56.5 last month from 54.4 in October.

ETFs in Focus

iShares MSCI USA Momentum Factor ETF (MTUM)

iShares MSCI USA Momentum Factor ETF follows the MSCI USA Momentum SR Variant Index, holding 125 stocks exhibiting a relatively higher price momentum. It is pretty well spread out across components, with none holding more than 5.2% of assets. iShares MSCI USA Momentum Factor ETF is skewed toward the healthcare sector at 36% energy round off the next spot with double-digit exposure each.

iShares MSCI USA Momentum Factor ETF has accumulated $11.9 billion in its asset base and trades in a solid volume of about 911,000 shares a day and charges 15 bps in fees per year.

Invesco DWA Momentum ETF (PDP)

Invesco DWA Momentum ETF tracks the Dorsey Wright Technical Leaders Index, which measures the performance of companies that demonstrate powerful relative strength characteristics. It holds 102 securities in its basket, with none making up for more than 3.3% of assets. Information technology takes the top spot at 25.2%, while energy and industrials round off the next two spots.

Invesco DWA Momentum ETF has amassed $1 billion in its asset base and charges 62 bps in annual fees. It trades in volume of 54,000 shares per day on average.

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 78 stocks in its basket, with key holdings in industrials, energy, financials and utilities.

Invesco S&P MidCap Momentum ETF has AUM of $1 billion and charges 33 bps in annual fees. It trades in an average daily volume of 71,000 shares and has a Zacks ETF Rank #2 (Buy).

Invesco S&P SmallCap Value with Momentum ETF (XSVM)

Invesco S&P SmallCap Value with Momentum ETF offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. XSVM holds a basket of 122 stocks, each making up for less than 2% share. Invesco S&P SmallCap Value with Momentum ETF has a double-digit allocation each in industrials, financials, consumer discretionary and energy sectors.

Invesco S&P SmallCap Value with Momentum ETF has AUM of $676 million and an average daily volume of 95,000 shares. XSVM charges 36 bps in annual fees and has a Zacks ETF Rank #3 (Hold).

SPDR Russell 1000 Momentum Focus ETF (ONEO)

SPDR Russell 1000 Momentum Focus ETF targets large-cap securities with a combination of core factors (high-value, high-quality, and low-size characteristics) and a focus factor comprising high-momentum characteristics. It follows the Russell 1000 Momentum Focused Factor Index, holding 885 stocks in its basket with key holdings in industrials, consumer discretionary, technology and energy.

With AUM of $290.8 million, SPDR Russell 1000 Momentum Focus ETF charges an annual fee of 20 bps and trades in an average daily volume of 1,000. It carries a Zacks ETF Rank #3.

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