The momentum strategy basically bets that hot movers will continue to rise, so investors would buy high and sell even higher. Investors who want to follow this momentum strategy will be betting on outperforming sectors flying even higher.
Supporting the ongoing growth in smart beta strategies, factors such as quality, momentum, value, size and minimum volatility have been drivers of returns across asset classes and helped shore up shortcomings of traditional market cap-weighted index funds.
Potential investors, though, should be aware that the momentum strategy typically works well under sustained market rallies and could breakdown during volatile conditions. Since defensive stocks typically do better during volatile conditions, the momentum strategy could load up on conservative picks and miss out on the initial recovery in riskier assets.
MTUM is not significantly more volatile than mainstream large-cap indexes. In fact, MTUM’s three-year standard deviation of 9.8% is below the same metric on the S&P 500.
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