When Momentum Isn't

Using factor strategies requires having proper context and expectations.

Barron's took a look at a couple of different types of momentum strategies and the extent to which some may have let down investors in recent months. Momentum strategies are typically trend following and often, trend means 10 months (or 12 as explored in the article). Momentum ETFs collectively did very well during the bull market (as a reminder I believe a bear market started in May).

Here is a look at the iShares Edge MSCI USA Momentum ETF (MTUM) from its inception to its high last summer;

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As you can see, it smoked the S&P 500. Here are the most recent six months.

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It is by no means the end of the world but something changed. An acquaintance manages a momentum ETF and a couple of years ago he told me that momentum tends to do relatively poorly in bear markets as well as big turns in the market, maybe the last six months have been a big turn? It tends to do best during the meat of a bull market. Invoking Karl Popper, it would only take one negative to disprove my friend's thought but MTUM's charts do support his notion.

At a high level, it is crucial to remember that no strategy can always be the best. Maybe we've isolated when momentum can do well and when it might lag. Accounting for the lag could be that because momentum is based on a ten-month trailing trend (or 12 months) and while most bear markets take a while to unfold it has usually been shorter than ten months.

I haven't written a lot of posts about smart beta/factor strategies but if you're lucky enough to buy one that goes on to outperform anywhere close to what's going on in that first chart, you need to consider some sort of active process for taking that gain and explore another strategy to rotate into even if that simply means back to market cap weighting.

Disclaimer: The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no ...

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