Investors can look to the momentum factor-based exchange traded fund strategy to capture high-flying equity market trends.

“If you can’t beat ‘em, join ‘em,” Andrew Ang, Head of Factor Investing Strategies, BlackRock, said in a research note. “This classic idiomatic expression epitomizes the momentum factor, a well-studied phenomenon in markets that has been a potent driver of excess returns. Momentum strategies identify and participate in trends, allocating to those securities that have been outperforming. Unlike well-known factors such as value and size, momentum is willing to go wherever the winners are, resulting in a dynamic approach that can keep up with quick changing trends.”

Ang explained that 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.

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.

When looking at the momentum factor, Ang argued that investors should not be dissuaded by three major myths:

  • Transaction costs/high turnover eat away any premium
  • Consistent momentum factor exposure cannot be captured
  • Momentum is a tax inefficient strategy

“Momentum has a well-deserved place within a portfolio and is especially diversifying to traditional value and size strategies. An easy way to gain exposure to the momentum factor is to add a thoughtfully constructed, single factor momentum ETF—one that efficiently captures the momentum and that has historically exhibited tax efficiency,” Ang added.

Investors who are interested in the momentum factor can look to funds like the iShares Edge MSCI USA Momentum Factor ETF (BATS: MTUM). The fund seeks to track the investment results of the MSCI USA Momentum Index, which consists of stocks exhibiting relatively higher momentum characteristics than the traditional market capitalization-weighted parent index, the MSCI USA Index, which includes U.S. large- and mid-capitalization stocks.

MTUM YTD Performance

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