Factor investing focuses on identifying stocks with certain characteristics, or factors, such as value, quality, momentum, size, and minimum volatility, that have historically been associated with higher returns.
However, factor returns have generally proven to be highly cyclical, and timing the market is never easy. Over the long term, momentum has outpaced the broader market.
The momentum effect, or the tendency of winning stocks to outperform losing stocks, has been documented in numerous academic studies, including the seminal paper by Jegadeesh and Titman (1993). Rather than buying low and selling high, momentum investors buy high and seek to sell at even higher prices.
The reasons behind this outperformance are not difficult to understand. Enthusiastic investors often pour money into highfliers, sometimes overlooking fundamentals in the process.
This year, momentum has been a standout factor as investors continue to flock to the market’s hottest stocks, particularly in the semiconductor and memory sectors. What distinguishes this momentum cycle from many others, however, is that it is being driven primarily by earnings growth.
Many of the market’s top-performing companies are generating enormous profits due to blockbuster demand for their products. In other words, these gains are not being driven by hype alone.
That said, momentum strategies remain prone to sharp and sudden reversals, particularly following broader market sell-offs.
To learn more about the iShares MSCI USA Momentum Factor ETF MTUM, Invesco S&P 500 Momentum ETF SPMO and Invesco DWA Technology Momentum ETF PTF, please watch the short video above.
Micron Technology MU, NVIDIA NVDA, Intel INTC, Sandisk SNDK and Broadcom AVGO are among the top holdings in these ETFs.
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Intel Corporation (INTC): Free Stock Analysis Report
Micron Technology, Inc. (MU): Free Stock Analysis Report
NVIDIA Corporation (NVDA): Free Stock Analysis Report
Sandisk Corporation (SNDK): Free Stock Analysis Report
Broadcom Inc. (AVGO): Free Stock Analysis Report
Invesco Dorsey Wright Technology Momentum ETF (PTF): ETF Research Reports
iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports
Invesco S&P 500 Momentum ETF (SPMO): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).