This is one of a series of articles discussing smart beta ETFs. Other smart beta articles you can read:
A momentum ETF is an ETF that tracks an index that screens for stocks that have recently demonstrated price momentum. The belief is that once a stock starts to go up in price, there is a tendency for a stock to continue to go up in price, until something significant happens to reverse the trend. And the stock price will continue to go up, even if the stock price becomes ridiculously expensive in terms of traditional measures of value such as price per earnings. So the idea behind momentum investing is to merely pick "winners" and hold onto them, regardless of how expensive the stock has become.
In a perfectly functioning, logical financial market, momentum investing should not really work. But momentum investors believe there is a certain "herd mentality" effect that distorts the market, at least in the short term. But price momentum doesn't last forever. Inevitably, something will happen and yesterday's winners will become today's also rans. So the secret sauce to momentum investing is how to capture the "trend" before it reverses. Although the approaches vary, most momentum investors tend to buy stocks who have performed well during the past 6 or 12 months, and then only hold onto those stocks for a short period of time. So momentum strategies tend to be characterized by high portfolio turnover.
There are a large number of ETFs that use momentum as a factor in selecting or weighting stocks, as shown in this table:
|Special Security Types||1|
|US Fixed Income||1|
|Year of Inception||Count|
Note that there were actually even more ETFs launched then this table shows, as we are only displaying the launch dates of ETFs still active in our database. There were more ETFs that were launched during these years that have since been closed down by their sponsor.
More and more ETFs are being launched that combine momentum investing with other investment factors:
|Number of Factors Used||Count|
Momentum ETFs use different approaches to selecting stocks based on price momentum, so let's look at two of the largest momentum ETFs as examples.
DWAQ, the PowerShares DWA NASDAQ Momentum Portfolio ETF, follows the Dorsey Wright NASDAQ Technical Leaders Index, which selects 100 stocks (out of 1,000 large cap stocks that trade on the NASDAQ) with the highest "proprietary relative strength (momentum) measure". Each security's score is based on intermediate and long-term price movements relative to a representative market benchmark and the other eligible securities.
MTUM, the iShares MSCI USA Momentum Factor ETF, is one of the largest momentum ETFs, and follows the MSCI USA Momentum Index. A momentum value is determined for each stock in the MSCI USA Index (about 625 mid and large cap stocks) by combining the stock’s recent 12-month and 6-month local price performance. This momentum value is then risk-adjusted to determine the stock’s momentum score. A fixed number of securities with the highest momentum scores are included in each MSCI Momentum Index, or about 125 stocks. The 125 stocks are weighted by the product of their momentum score and their market cap.
Here are the ETFs that only use momentum as an investment factor (i.e. they are not multi-factor ETFs), if you want to read some examples of the approaches taken by momentum ETFs:
|XSMO||Invesco S&P SmallCap Momentum ETF||03/03/2005||US Equity|
|PUI||Invesco DWA Utilities Momentum Portfolio ETF||10/26/2005||US Equity|
|PEZ||Invesco DWA Consumer Cyclicals Momentum Portfolio ETF||10/12/2006||US Equity|
|PFI||Invesco DWA Financial Momentum Portfolio ETF||10/12/2006||US Equity|
|PRN||Invesco DWA Industrials Momentum ETF||10/12/2006||US Equity|
|PTF||Invesco DWA Technology Momentum Portfolio ETF||10/12/2006||US Equity|
|PSL||Invesco Dynamic Consumer Staples Sector ETF||10/12/2006||US Equity|
|PTH||Invesco DWA Healthcare Momentum Portfolio ETF||10/12/2006||US Equity|
|PYZ||Invesco DWA Basic Materials Momentum Portfolio ETF||10/12/2006||US Equity|
|PXI||Invesco DWA Energy Momentum Portfolio ETF||10/12/2006||US Equity|
|PDP||Invesco DWA Momentum Portfolio ETF||03/01/2007||US Equity|
|PIE||Emerging Markets Technical Leaders ETF||12/28/2007||Global Equity|
|PIZ||Invesco DWA Developed Markets Momentum Portfolio ETF||12/28/2007||Global Equity|
|AADR||Dorsey Wright ADR ETF||07/20/2010||Global Equity|
|EEMO||Invesco S&P Emerging Markets Momentum ETF||02/23/2012||Global Equity|
|IDMO||Invesco S&P International Developed Momentum ETF||02/23/2012||Global Equity|
|DWAS||Invesco DWA SmallCap Momentum ETF||07/19/2012||US Equity|
|DWPP||First Trust Dorsey Wright Peoples Portfolio ETF||08/29/2012||US Equity|
|MMTM||SPDR S&P 1500 Momentum Tilt ETF||10/24/2012||US Equity|
|MTUM||iShares MSCI USA Momentum Factor ETF||04/16/2013||US Equity|
|IFV||First Trust Dorsey Wright International Focus 5 ETF||07/22/2014||Global Equity|
|DWAT||Arrow DWA Tactical ETF||10/01/2014||Asset Allocation|
|GMOM||Cambria Global Momentum ETF||11/03/2014||Asset Allocation|
|IMTM||iShares MSCI Intl Dev Mom Factor ETF||01/13/2015||Global Equity|
|SPMO||Invesco S&P 500 Momentum Portfolio ETF||10/09/2015||US Equity|
|QMOM||Momentumshares U.S. Quantitative Momentum ETF||12/02/2015||US Equity|
|JMOM||JPMorgan U.S. Momentum Factor ETF||11/09/2017||US Equity|
|DWCR||Arrow DWA Country Rotation ETF||12/29/2017||Global Equity|
|VFMO||Vanguard U.S. Momentum Factor ETF||02/14/2018||US Equity|
|DALI||First Trust Dorsey Wright DALI 1 ETF||05/14/2018||Asset Allocation|
|DWMC||Dorsey Wright Micro Cap ETF||07/10/2018||US Equity|
|DVLU||First Trust Dorsey Wright Momentum & Value ETF||09/05/2018||US Equity|
|DWAW||AdvisorShares Dorsey Wright FSM All Cap World ETF||12/27/2019||Global Equity|
|QQQA||ProShares Nasdaq-100 Dorsey Wright Momentum ETF||05/19/2021||US Equity|
As a stand alone factor, momentum can lead to slight outperformance compared to the market, as shown by the charts shown above of MTUM and DWAQ. As another example, let's look at SPMO, the PowerShares S&P 500 Momentum Portfolio ETF, which tracks the S&P 500 Momentum Index. The S&P 500 Momentum Index selects the 100 stocks in the S&P 500 Index that have a high "momentum score", using a 12 month look back period.
One thing we do at ETFAnalyst.com is give each ETF a rating for long term investors. Here are the momentum ETFs that we have given a long-term investor rating of "editor's choice", our highest rating:
|PSJ||Invesco Dynamic Software ETF||06/23/2005||US Equity|
|RPG||Invesco S&P 500 Pure Growth ETF||03/01/2006||US Equity|
|FDT||First Trust Developed Markets Ex-US AlphaDEX ETF||04/18/2011||Global Equity|
|MTUM||iShares MSCI USA Momentum Factor ETF||04/16/2013||US Equity|
|FLQE||Franklin LibertyQ Emerging Markets ETF||06/01/2016||Global Equity|
|CAPD||iPath Shiller CAPE ETN||11/21/2018||US Equity|
All data is a live query from our database. The wording was last updated: 01/31/2018.
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