Why Invest In a Momentum Fund?
In 1990’s, momentum investing was prevalent when the markets were on a rise. The strategy involves purchasing a sector of the market that has posted the greatest earnings in the market over the previous year. Momentum funds are now making a comeback as research suggests that they can be a great long-term investment strategy for you.
A momentum fund invests in companies based on current trends including earnings or price movement. Momentum fund managers invest in companies with “positive momentum.” They may short sell stocks of those with “negative momentum.” Basically, investing in momentum funds is a trading strategy where you buy securities that rise and sell them at their peak.
Momentum funds can give you high returns. But, they require constant monitoring because the positive or negative momentum can be short term and change directions.
Investing in Momentum Funds
Momentum funds base their investment strategies on several factors. So, you must understand the fund’s investment benefits and risks. Momentum funds mainly focus on a company’s past performance. It differs from popular growth funds. Momentum funds follow performance momentum but focus more on past performance trends than the expectations for future revenue and earnings.
To ensure that investments are based on the most current historical return evaluations, active momentum funds often rebalance quarterly. However, passive momentum funds rebalance semi-annually. Frequent rebalancing helps align the strategy with its main focus. So, these funds have high turnover and involve taking advantage of short-term earnings or price gains.
Some popular momentum funds include the AQR Large Cap Momentum Style Fund offered as a mutual fund. Other momentum funds exist as ETFs. They include the SPDR Russell 1000 Momentum Focus ETF, iShares Edge MSCI USA Momentum Factor ETF, USAA MSCI USA Value Momentum Blend Index ETF, Invesco S&P Emerging Markets Momentum Portfolio, and the USAA MSCI International Value Momentum Blend Index ETF.
Benefits of Momentum Funds
The benefits of momentum funds include the following:
- They have great potential for high profits over the short term. Over time, the potential profit of investing in momentum funds can be very high.
- You can leverage the market’s volatility to your advantage. Through monitoring, you can capitalize on volatile market trends. Invest in stocks that are on a rise and then sell them before the prices fall.
- Use the emotional decisions of other investors to your advantage. As a momentum investor, you can reap the benefits of the changes in stock prices caused by emotional investors.
Risks of Momentum Funds
There are some risks associated with momentum funds. They include:
- You’ll get a high stock turnover, but it can be expensive when it comes to fees.
- You’ll need to constantly monitor the markets each day. This means you’ll have to watch out for all the updates, especially negative news that can sway emotional investors.
- Investing in momentum funds can be market sensitive. It works best in a bull market, allowing investors to gain more. However, this can turn around in a bear market. If you’re an individual investor, momentum investing can lead to overall portfolio losses. Your purchase decisions will be reactions to older news.
The Bottom Line
Momentum investing is making a comeback and is a great investment option for you. But it may not be practical for all investors. You may consider practicing investment in momentum funds if you can devote the required time. To know more about momentum investment, check out ANSPL’s trading options.
