Momentum Investing With ETFs
ETFs may offer the most effective way for individual investors to exploit the momentum phenomenon.
Last week, my colleague Alex Bryan wrote an article titled "Does Momentum Investing Work?" Alex's article offers an introduction to momentum drawing on a growing body of academic research on the topic to examine its potential sources, how it might be exploited, and the obstacles facing investors seeking to capitalize on this phenomenon. If you haven't read his piece, I recommend doing so before reading any further as it will serve as the basis for this article.
Trying to actively harness momentum at the level of individual stocks will result in a portfolio with high volatility, high transaction costs, and a large number of positions that can border on unwieldy. However, by swapping stocks with exchange-traded funds, we can mitigate many of the issues that complicate implementing a momentum strategy with just stocks.
Timothy Strauts has a position in the following securities mentioned above: XLF. Find out about Morningstar’s editorial policies.