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Momentum Fund

What is a ‘Momentum Fund’

A Momentum fund is an investment fund that invests in companies based on current trends in such things as earnings or price movement. Managers of these funds invest in companies with positive momentum and may also short stocks of companies with negative momentum.

BREAKING DOWN ‘Momentum Fund’

Momentum funds can be high return investments however they require a high level of monitoring as momentum factors can often be short-term causing directional changes. While momentum factors are generally often a consideration across all types of active investment strategies few funds focus exclusively on investing purely in a company’s directional momentum.

Momentum Analysis

Momentum factors can include many different stock characteristics. Some of the most common are price movement, revenue and earnings. In the investment industry a number of momentum indexes have been created which are broadly utilized by many momentum focused exchange-traded funds (ETFs). These ETFs generally consider the one-year trailing performance returns of stocks in a targeted momentum index. Many momentum indexes also give stocks a momentum score in addition to following performance returns. These momentum scores can be based on fundamental characteristics such as value, size and quality. Momentum scores often integrate fundamental analysis into the value and quality metrics to help provide additional input beyond just performance returns. Some technically focused funds may also invest based on technical indicators such as price breakouts from historic levels.

Generally, momentum analysis places a high emphasis on a stock’s market return. Many funds rely on past performance as the primary factor for inclusion. These funds provide support for the notion that past performance can be an indicator of a company’s future returns. In many cases positive performance is generated by positive revenue and earnings compounding over time. However, investors may want to be cautious of these funds since they can be highly correlated to systemic risks and will often follow market returns as well.

Investing in Momentum Funds

Momentum funds can base their investment strategies on numerous factors which makes it important for investors to ensure they understand the fund’s investing philosophy and risks. Most funds primarily focus on a company’s past performance. This strategy can differ from popular growth funds that also follow performance momentum but place greater emphasis on the expectations for future revenue and earnings rather than past performance trends.

Actively managed momentum funds will often rebalance quarterly to ensure the portfolio’s investments are based on the most current historical return evaluations. Most passive momentum indexes will rebalance semi-annually. The frequent rebalancing helps to keep the strategy aligned with its focus. Thus, these funds typically have high turnover and often take advantage of short-term price movement gains.

The AQR Large Cap Momentum Style Fund is one of the most popular momentum funds offered as a mutual fund. Numerous other momentum funds also exist in ETF vehicles such as the iShares Edge MSCI USA Momentum Factor ETF, SPDR Russell 1000 Momentum Focus ETF, PowerShares S&P Emerging Markets Momentum Portfolio, USAA MSCI USA Value Momentum Blend Index ETF and the USAA MSCI International Value Momentum Blend Index ETF.

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