Smart Beta: Momentum ETFs

In the sixth in our series explaining the different styles investors can add to their portfolios through strategic beta ETFs, Hortense Bioy talks momentum investing

Hortense Bioy, CFA 20 December, 2017 | 8:11AM

 

Hortense Bioy: Momentum is one of the best-known factors in investing. Momentum investing is about buying winning stocks, stocks that have done well in the recent past, and selling losing stocks, stocks that have done poorly. Academic research shows that stocks that have recently risen or fallen in price will continue that trend over the short-to-medium term, typically over six to 12 months. And over the long term, high-momentum stocks will outperform the market.

The idea is quite simple, but the implementation is difficult. And a badly-implemented momentum strategy can result in poor performance. Momentum is one of the most challenging factors to exploit.

One issue with momentum strategies is their transaction costs; they have relatively high-levels of turnover. Investors seeking to capture the momentum premium can turn to ETFs. But as always, it's important to understand the methodology that each fund uses to select its holdings.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive fund research in Europe.