Momentum Investing Gives You An Edge, Until It Doesn’t

Since 2020, momentum investing has generated significantly better returns than other strategies. Such is not surprising, given the massive amounts of stimulus injected into the financial system. However, Brett Arends for Marketwatch noted in 2021 that momentum investing can give you an edge. To wit:

“Its success ‘is a well-established empirical fact,’ and can be demonstrated across multiple assets and over 212 years of stock market data, argues money manager Cliff Asness and his colleagues. It is ‘the premier market anomaly,’ writes analyst Gary Antonacci. It trounces a simple ‘buy and hold’ stock market strategy going back almost 100 hundred years, estimates money manager Meb Faber.”

While momentum investing is appealing in a liquidity-driven bull market, is it always the best strategy? As noted in the “Best Way To Invest:”

The last decade has been a boon for the index ETF industry, financial applications, and media websites promoting ‘buy and hold’ investing and diversification strategies. But is the ‘best way to invest’ during a bull market also the best way to invest during a bear market? Or, do different times call for different strategies?

That is the question we will explore further.

Momentum Investing Isn’t Passive

Brett compares several ETF funds over the past five years in his discussion. To simplify our analysis, we will use the following three ETFs from 2014 to the present. (2014 is the earliest date that all three ETFs have performance data.)

  • SPDR S&P 500 ETF (SPY) as the “buy and hold” proxy,
  • IShares Momentum ETF (MTUM) as the “momentum” proxy; and,
  • IShares Value ETF (IVE) as the “value” proxy.

For our analysis, we calculated the growth of $1 invested in each ETF from January 2014 on a nominal capital appreciation basis only.

At first blush, the obvious choice for investors was momentum when compared to the S&P 500 or value.

growth

So, is that all there is to it?