Motley Fool Momentum
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Overview
The Motley Fool Momentum Index was developed by Motley Fool Investment Analytics, LLC to define and track up to 100 companies that have the highest momentum rating out of the most liquid U.S. companies that have been recommended by The Motley Fool, LLC's analysts.
The Motley Fool Momentum Index is reconstituted quarterly, at which time each company's share of the Index is set to equal the company's share of all index companies' aggregate market value tilted by the Momentum Composite Score (the "Weighting Date"). The Index is calculated to capture both price appreciation and total return, which assumes dividends are reinvested pro-rata across constituents on an index-weighted basis.
Membership Criteria
To be eligible for inclusion in the Motley Fool Momentum Index, companies must be domiciled in the United States and are either active recommendations of a The Motley Fool, LLC research publication or rank among the 150 highest rated U.S. companies in the Fool analyst opinion database, Fool Intel, subject to universe continuity rules. Liquid firms are those that have traded at least $1 million worth of shares daily, on average, during the preceding three months.
Common stocks, REITS, tracking stocks and holding companies are eligible for inclusion. ADRs, GDR, EDRs, Preferred Stocks, closed-end funds, exchange-traded funds and derivatives are not eligible.
Universe continuity rules are applied to the eligible universe during reconstitution. A buffer sized at 30% of the 150-stock conviction target - or 45 stocks - is applied to the Fool Intel universe sleeve to reduce universe turnover.
Specifically, stocks ranked in the top 105 positions based on Fool Intel conviction (70% of the 150-stock target) are automatically included in the candidate universe. Additionally, companies that were previously eligible based on their Fool Intel ratings will still be included as long as their rank is equal to or better than 195 (130% of the 150-stock target). Stocks are then added based on conviction score rank until the 150-stock target is reached.
Securities that meet the requirements for universe inclusion must also meet the minimum requirements for calculating the Momentum Composite Score. Specifically, they must have current pricing data.
Momentum Composite Score
The Momentum Composite Score is the equal weighted average of three separate scores - a relative strength score, factor momentum score, and an adjusted price-to-low score. The construction details for each stand-alone score are provided in the table below.
| Score | Momentum metric | Sign | Minimum calculation requirements |
|---|---|---|---|
| Relative Strength | Weighted daily returns from trading date T-504 through trading date T-21 with a half-life of 126 trading days, represented as a cross-sectional z-score relative to the universe of investable U.S.-listed securities used to estimate a fundamental factor model centered at the cap-weighted mean of the model estimation universe. | + | Daily pricing data for calculating returns |
| Factor Momentum | The one-year-trailing cumulative arithmetic factor return minus the average of arithmetic cumulative factor return legs starting one year prior and extending to the weighting date, using daily factor returns estimated from a fundamental factor model, scaled by the one-year-trailing standard deviation of daily factor returns. | + | At least 21 trading days of available daily factor returns |
| Adjusted Price-To-Low | The most recent close price divided by one-year-trailing minimum closing price multiplied by the product of the sign of the one-year return and the R squared of the trailing one year of closing prices. | + | At least 126 trading days of trailing returns |
Momentum variables are calculated for each stock represented in the Index's inclusion universe.
In order for a stock to qualify for inclusion in the Index it must possess a positive relative strength score, signifying that it is a traditional momentum "winner" with respect to the cap-weighted mean of an estimation universe of investable U.S.-listed securities.
After initial calculation, raw metrics are then winsorized at the 5th and 95th percentiles. Next, each winsorized metric is transformed into a cross-sectional z-score:
Z = (x − μ) / σ
Where:
- x is the winsorized metric for a given security
- µ is the mean of the winsorized variable candidate universe, excluding missing values
- σ is the standard deviation of the winsorized variable in the candidate universe, excluding missing values
The final composite Z score for a stock is an equal-weighted average of its qualifying stand-alone scores. The final Momentum Composite Score is calculated from the composite Z score as follows:
if Z > 0 → Momentum Score = 1 + Z
if Z ≤ 0 → Momentum Score = (1 − Z)-1
To determine final index membership, candidate stocks with positive relative strength scores are first ranked based on their composite scores. If fewer than 100 stocks possess positive relative strength scores then all qualifying candidate stocks are included. Otherwise, the top 100 stocks are then selected based on the following index continuity rules. A buffer sized at 30% of the 100-stock target - or 30 stocks - is applied to the qualifying inclusion universe to reduce Index turnover.
Specifically, stocks ranked in the top 70 positions based on their Momentum Composite Scores (70% of the 100-stock target) are automatically included in the candidate universe. Additionally, companies that were previously eligible based on their Momentum Composite Scores will still be included as long as their rank is equal to or better than 130 (130% of the 100-stock target). Stocks are then added based on conviction score rank until the 100-stock target is reached.
Performance Calculations
Index price level calculation
PIndex = 1/D Σi SiPi
Where:
- Si = number of shares of stock i
- Pi = price of stock i
- D = index divisor
The Motley Fool Momentum Index is calculated every weekday. If trading is suspended while one of the three major exchanges is still open, the last traded price for that stock is used for all subsequent index computations until trading resumes. If trading is suspended before opening, the stock's adjusted closing price from the previous day is used to calculate the Index. Until a particular stock opens, its adjusted closing price from the previous day is used in the Index computation. Index values are calculated both on a price and total-return basis, in U.S. dollars. Index values are calculated and disseminated on an end-of-day basis.
Weighting
Each component's initial weight on the Weighting Date reflects the component's proportion of total market-capitalization multiplied by Momentum Composite Score.
Initial Index Weight = Momentum Composite Score × Firm Market Capitalization
The above weights are normalized to 100%. A maximum initial position limit of 4.8% is enforced, subject to the following logic:
- Identify stocks with weights that exceed the maximum position limit
- Set these weights to the maximum position limit
- Reallocate the excess weight across the remaining names in a pro-rata fashion
- Repeat steps 1-3 until no offending positions remain
Initial weights further undergo adjustments to maintain index integrity and diversification, based on the following rule(s):
- If any single issuer's initial weight exceeds 24% of the total index, that weight is adjusted down to 22%.
- Subsequently, if the aggregate weight of issuers with "concentrated positions" (above 4.8%) exceeds 48% of the total index, that aggregate weight is adjusted down to 44% and balance is pro-rated among the remaining constituents while preserving the order of initial weights.
The Weighting Date is the second to last Monday of each Calendar Quarter. These weights take effect on the Weighting Date and are price-drifted to the Reconstitution Date.
The Index is tested regularly to ensure adherence to the prescribed weighting constraints above. A Special Rebalance may be announced at any moment when such action is deemed necessary for upholding the index's structural integrity.
Dividend Reinvestment
Normal dividend payments are not taken into account in the price index, whereas they are reinvested pro-rata across the index based on prevailing constituent weights for the total return index. Special dividends require index divisor adjustments to prevent the distribution from distorting the price index.
Multiple Share Classes
In the event a component company issues multiple classes of common stock, the specific shares recommended by The Motley Fool, LLC will be used. If both share classes have been recommended, or if neither is specified over the other, the most liquid share class will be used.
Index Maintenance
Index maintenance includes monitoring and implementing the adjustments for company deletions, stock splits, stock dividends, spin-offs, or other corporate actions. Some corporate actions, such as stock splits, stock dividends, spin-offs and rights offerings require changes in the Index shares and the stock prices of the component companies.
Component Changes
Additions
Additions to the Index are made at the quarterly reconstitution, according to the inclusion criteria defined above. No additions are made between reconstitutions, except in the case of certain spinoffs and acquisitions, as defined below.
Delistings
If a component company is delisted, it is deleted from the Index and weights of remaining components are adjusted proportionately.
Mergers & Acquisitions
If one component company is acquired by another, treatment varies depending on the terms of the deal. If stock is used, the acquiring/surviving company's share of the Index will be increased, to reflect the terms of the deal and the value of the acquired company. Securities removed due to M&A activity after trading has ceased will be removed at the acquisition price for cash transactions and a derived acquisition price for stock or cash and stock transactions. Otherwise, the security will be removed at the last traded price as of market close the day prior to removal.
If cash is used, the value of the target company, based on its last close price, will be distributed pro-rata across the remaining index constituents. If a combination of cash and stock are used, the cash portion of the deal will be distributed, pro-rata, across the remaining constituents, and the acquiring company's share will be adjusted based on the stock portion of the deal.
If a component company is acquired by a non-component company, the value of the target company will be distributed, pro-rata, to the remaining constituents based on its last close price.
Spin Offs
If a company is spun-off from an existing component company, it is allowed to stay in the index until the next quarterly reconstitution.
Index Divisor Adjustments
Changes in the Index's aggregate market capitalization, due to changes in composition, weighting or corporate actions will result in changes to the Index's divisor. Corporate actions that require divisor adjustment will be implemented prior to the opening of trading on the effective date. In certain instances, where information is incomplete or if the action is announced too close to the ex-date, the adjustment will be implemented at the close of the following day, or as soon as practical thereafter. For corporate actions not described herein, or combinations of different types of corporate events and other exceptional cases, Motley Fool Investment Analytics, LLC reserves the right to determine the appropriate implementation method.