What is Momentum Investing? (Plain English Definition)
Definition: Momentum investing is a strategy that buys securities that have been rising in price and sells those that have been falling, based on the tendency for trends to continue.
Momentum Investing Explained Simply
Momentum investing is based on the observation that stocks that have performed well recently tend to continue performing well in the near term, and stocks that have performed poorly tend to keep underperforming. This persistence of trends has been documented across markets and time periods, making momentum one of the most well-established investment factors.
Momentum strategies typically look at returns over the past 6 to 12 months to identify winners and losers. Stocks with the strongest recent performance are bought, while the weakest performers are avoided or sold. The strategy is rebalanced regularly -- often monthly or quarterly -- to capture ongoing trends and exit positions when momentum fades.
Momentum ETFs systematically apply this approach to a large universe of stocks. Popular momentum ETFs include the iShares MSCI USA Momentum Factor ETF (MTUM) and the Invesco S&P 500 Momentum ETF (SPMO). These funds automatically rotate into stocks showing the strongest price momentum, removing the emotional biases that make momentum investing difficult for individual investors.
Momentum Investing Example
A momentum ETF screens the S&P 500 and identifies that technology and healthcare stocks have had the strongest 12-month returns. It overweights these sectors and underweights sectors like energy and utilities that have lagged. Six months later, if energy stocks have started outperforming while tech has slowed, the ETF rebalances to reflect the new momentum leaders. This systematic rotation captures trends as they develop.
Why Momentum Investing Matters for ETF Investors
Momentum is one of the few investment factors that has shown consistent outperformance across decades of data. However, momentum strategies can experience sharp reversals -- when trends suddenly reverse, momentum portfolios can suffer steep losses in a short period. For ETF investors, momentum ETFs offer a way to tilt your portfolio toward stocks with positive price trends. They work best as a complement to a core index holding rather than a standalone strategy. The factor tends to perform well during strong bull markets but can struggle during market transitions and reversals, so it should represent only a portion of a diversified portfolio.
Momentum Investing vs Growth Investing
| Momentum Investing | Growth Investing |
|---|---|
| Momentum investing is a strategy that buys securities that have been rising in price and sells those that have been falling, based on the tendency for trends to continue. | See full definition of Growth Investing |
While momentum investing and growth investing are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Growth Investing
Growth investing is a strategy focused on buying stocks of companies expected to grow their earnings faster than the overall market.
Technical Analysis
Technical analysis is the study of past price movements and trading volume patterns to predict future price direction.
Fundamental Analysis
Fundamental analysis is the method of evaluating a security by examining the underlying financial and economic factors that affect its value.
Value Investing
Value investing is a strategy focused on buying stocks that appear underpriced relative to their fundamental worth, seeking a margin of safety.
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