Quick Facts
- Fact 1: A momentum ETF screens for assets that have shown price appreciation or strong trends over a short time period.
- Fact 2: Momentum investing leverages the idea that past price movements can predict future movements in assets.
- Fact 3: ETFs enable investors to diversify their portfolios by investing in bonds, stocks, or index funds based on the investor’s risk profile.
- Fact 4: A fund’s momentum can be measured using formulas such as those developed by Robert Shiller, Joseph Schumpeter, or Amihud & Mendelson.
- Fact 5: Market capitalization can affect momentum scores, as large-cap stocks often show less volatility in their prices.
- Fact 6: The U.S. dollar can impact commodity prices and may lead to divergent momentum between different investment assets.
- Fact 7: Diversification can be strategic in momentum ETF screening by mixing high-growth assets with slower-growing stocks.
- Fact 8: In addition to stocks, currency and interest rate fluctuations can also influence investment momentum.
- Fact 9: Fund selectors evaluating ETFs can also review expenses, fee structures, and underlying investment strategy to match their investment goals.
- Fact 10: Determining portfolio size and target asset allocation are part of an effective ETF momentum investing strategy.
Unlocking the Power of Momentum ETF Screening: A Personal Journey
As an investor, I’ve always been fascinated by the concept of momentum investing. The idea that certain stocks or ETFs can exhibit a sustained period of outperformance, driven by a combination of fundamental and technical factors, is both intriguing and intimidating. In this article, I’ll share my personal experience with momentum ETF screening, highlighting the key takeaways, challenges, and insights I’ve gained along the way.
Why Momentum Investing?
I’ll be the first to admit that my initial foray into momentum investing was fueled by FOMO (fear of missing out). I witnessed friends and colleagues raking in impressive returns from momentum-driven ETFs, and I didn’t want to be left behind. But as I delved deeper, I realized that momentum investing is more than just a flashy strategy – it’s rooted in empirical evidence and academic research.
| Momentum Investing in a Nutshell |
|---|
| Momentum investing is a strategy that involves identifying and investing in assets that have demonstrated strong price performance over a specific timeframe. |
| The underlying idea is that these assets will continue to outperform the broader market due to persisting trends and market inefficiencies. |
| Momentum investing can be applied to various asset classes, including stocks, ETFs, and mutual funds. |
The Screening Process: My Journey Begins
With a solid understanding of momentum investing, I set out to develop a screening process for momentum ETFs. My goal was to identify a set of ETFs that had consistently demonstrated strong price momentum over a specific timeframe.
Step 1: Define the Universe
I began by defining a universe of ETFs that I’d screen for momentum. I opted for a broad-based approach, selecting ETFs that covered various asset classes, sectors, and geographic regions.
| ETF Universe |
|---|
| US Equity ETFs (e.g., SPDR S&P 500 ETF Trust, iShares Core S&P Total US Stock Market ETF) |
| International Equity ETFs (e.g., iShares MSCI EAFE ETF, Vanguard FTSE All-World ex-US ETF) |
| Fixed Income ETFs (e.g., iShares Core US Aggregate Bond ETF, SPDR Bloomberg Barclays 1-3 Month T-Bill ETF) |
| Alternative ETFs (e.g., Invesco PowerShares DB Commodity Index Tracking Fund, WisdomTree Bloomberg US Dollar Bullish Fund) |
Step 2: Select Momentum Metrics
Next, I needed to choose momentum metrics that would help me identify top-performing ETFs. After researching various approaches, I settled on a combination of metrics that balanced short-term and long-term performance.
| Momentum Metrics |
|---|
| 3-Month Price Return |
| 6-Month Price Return |
| 12-Month Price Return |
| Relative Strength Index (RSI) |
Step 3: Apply the Screen
With my universe and momentum metrics defined, I applied the screen to my ETF universe. I used a combination of absolute and relative momentum approaches to identify the top-performing ETFs.
The Results: Insights and Challenges
After running the screen, I was left with a list of top-performing momentum ETFs. While the results were promising, I quickly realized that momentum investing is not without its challenges.
Challenge 1: Time-Frame Sensitivity
One of the biggest challenges I faced was time-frame sensitivity. I found that momentum ETFs that performed well over a shorter timeframe (e.g., 3-months) often didn’t maintain their momentum over longer timeframes (e.g., 12-months).
Challenge 2: Overfitting and Over-Rotation
Another challenge was overfitting and over-rotation. I found that my screen was prone to selecting ETFs that had recently experienced a significant price surge, only to see them revert to their mean shortly thereafter.
Lessons Learned and Next Steps
Through this experience, I’ve learned several valuable lessons:
- Momentum investing is a nuanced strategy that requires a deep understanding of the underlying mechanics and market dynamics.
- No single momentum metric is foolproof; a combination of metrics is essential to identifying sustainable momentum.
- Continuous monitoring and rebalancing are crucial to maintaining a momentum-driven portfolio.
As I continue to refine my momentum ETF screening process, I’m excited to explore new approaches and techniques that can help me stay ahead of the curve. Will you join me on this journey of discovery?
