“The volatility of the macro environment also matters. We find in our analysis that momentum has outperformed broad indexes in low macro vol regimes and lagged slightly in high macro vol regimes,” said BlackRock. “Our economic regime model indicates we are in a low macro vol regime—and one we believe has staying power. The early-February volatility spike came on the heels of an unusually placid 2017. We do not expect a return to the ultra-calm conditions, nor do we believe this episode represents a shift out of the low-vol regime.”
Since momentum strategies can overweight riskier stocks, the ETF could could underperform during another correction. 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.
“Overall, we see potential for momentum to outperform over the next three to six months absent a deterioration in the economic growth outlook, a significant deceleration in earnings momentum, or a geopolitical crisis that brings into question the bright economic outlook or spoils risk appetite,” according to BlackRock.
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