Momentum ETFs

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:

Alternatives 1
Asset Allocation3
Global Equity53
Special Security Types1
US Equity 127
US Fixed Income1

Here is a count by the date of inception:

Year of InceptionCount

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 UsedCount

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:

SymbolDescriptionInception DateCategoryActions
XSMOInvesco S&P SmallCap Momentum ETF03/03/2005US Equity Analyze
PUIInvesco DWA Utilities Momentum Portfolio ETF10/26/2005US Equity Analyze
PEZInvesco DWA Consumer Cyclicals Momentum Portfolio ETF10/12/2006US Equity Analyze
PFIInvesco DWA Financial Momentum Portfolio ETF10/12/2006US Equity Analyze
PRNInvesco DWA Industrials Momentum ETF10/12/2006US EquityAnalyze
PSLInvesco Dynamic Consumer Staples Sector ETF10/12/2006US EquityAnalyze
PTFInvesco DWA Technology Momentum Portfolio ETF10/12/2006US Equity Analyze
PTHInvesco DWA Healthcare Momentum Portfolio ETF10/12/2006US Equity Analyze
PXIInvesco DWA Energy Momentum Portfolio ETF10/12/2006US Equity Analyze
PYZInvesco DWA Basic Materials Momentum Portfolio ETF10/12/2006US Equity Analyze
PDPInvesco DWA Momentum Portfolio ETF03/01/2007US Equity Analyze
PIEEmerging Markets Technical Leaders ETF12/28/2007Global EquityAnalyze
PIZInvesco DWA Developed Markets Momentum Portfolio ETF12/28/2007Global Equity Analyze
AADRDorsey Wright ADR ETF07/20/2010Global EquityAnalyze
EEMOInvesco S&P Emerging Markets Momentum ETF02/23/2012Global EquityAnalyze
IDMOInvesco S&P International Developed Momentum ETF02/23/2012Global EquityAnalyze
DWASInvesco DWA SmallCap Momentum ETF07/19/2012US Equity Analyze
DWPPFirst Trust Dorsey Wright Peoples Portfolio ETF08/29/2012US Equity Analyze
MMTMSPDR S&P 1500 Momentum Tilt ETF10/24/2012US EquityAnalyze
MTUMiShares MSCI USA Momentum Factor ETF04/16/2013US Equity Analyze
IFVFirst Trust Dorsey Wright International Focus 5 ETF 07/22/2014Global EquityAnalyze
DWATArrow DWA Tactical ETF10/01/2014Asset AllocationAnalyze
GMOMCambria Global Momentum ETF11/03/2014Asset AllocationAnalyze
IMTMiShares MSCI Intl Dev Mom Factor ETF01/13/2015Global EquityAnalyze
SPMOInvesco S&P 500 Momentum Portfolio ETF10/09/2015US EquityAnalyze
QMOMMomentumshares U.S. Quantitative Momentum ETF12/02/2015US EquityAnalyze
JMOMJPMorgan U.S. Momentum Factor ETF11/09/2017US EquityAnalyze
DWCRArrow DWA Country Rotation ETF12/29/2017Global EquityAnalyze
VFMOVanguard U.S. Momentum Factor ETF02/14/2018US EquityAnalyze
DALIFirst Trust Dorsey Wright DALI 1 ETF05/14/2018Asset AllocationAnalyze
DWMCDorsey Wright Micro Cap ETF07/10/2018US EquityAnalyze
DVLUFirst Trust Dorsey Wright Momentum & Value ETF09/05/2018US Equity Analyze
DWAWAdvisorShares Dorsey Wright FSM All Cap World ETF12/27/2019Global EquityAnalyze
QQQAProShares Nasdaq-100 Dorsey Wright Momentum ETF05/19/2021US Equity Analyze

Does momentum investing work?

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 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:

SymbolDescriptionInception DateCategoryActions
PSJInvesco Dynamic Software ETF06/23/2005US EquityAnalyze
RPGInvesco S&P 500 Pure Growth ETF03/01/2006US Equity Analyze
FDTFirst Trust Developed Markets Ex-US AlphaDEX ETF04/18/2011Global Equity Analyze
MTUMiShares MSCI USA Momentum Factor ETF04/16/2013US Equity Analyze
FLQEFranklin LibertyQ Emerging Markets ETF06/01/2016Global EquityAnalyze
CAPDiPath Shiller CAPE ETN11/21/2018US Equity Analyze

All data is a live query from our database. The wording was last updated: 01/31/2018.

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