Momentum is a favored investment factor, and while often persistent over the long-term, it can burn investors from time to time. Diligent preparation for that scenario is available through the AGFiQ U.S. Market Neutral Momentum Fund (MOM).

MOM seeks results that are in tune with Dow Jones U.S. Thematic Market Neutral Momentum Index. In order for the fund to accomplish its goal, “MOM provides exposure to the ‘momentum’ factor by investing long in U.S. equities that have had above-average total returns and shorting those securities that have had below-average total returns,” according to the fund’s fact sheet.

Momentum tends to be negatively correlated to factors like size and value since momentum identifies securities that are trending upwards, as these stocks tend to reflect successful companies with positive trends that become bigger and bigger. Consequently, investors can also enjoy the diversification benefits of adding momentum strategies to small-cap and value-heavy portfolios.

How Does the Momentum Factor Work In Practice?

Momentum investing is rooted in the notion that securities that are on torrid paces will continue acting that way over the near-term, while laggards will continue slumping. Long-term data for the momentum factor are compelling, but the factor can be volatile.

Momentum—once it picks up, it can be difficult to stop and while the debate in the capital markets is whether value can sustain its lead overgrowth, investors can’t forget about the momentum factor, especially if events like a coronavirus easing or cure stir a rally for riskier assets.

Academic research has also backed the momentum play over the long-term. Professors Robert Shiller and Richard Thaler have found that investors tend to not immediately react to new information and exacerbate trends.

MOM YTD Performance

High momentum stocks are those that are capable of rising very fast in a short period of time, which makes them very attractive to potential buyers. However, in many cases, these stocks can also crash unexpectedly and carry significant risks as a result. When handled properly, however, momentum trading can be a rewarding method of profiting from the stock market.

For more alternative investing ideas, visit our Alternatives Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.