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Unlocking the Power of Momentum Investing: A Proven Strategy for High Returns

Momentum Investing: A High-Return Strategy in the U.S. Stock Market

Momentum investing has emerged as a successful strategy in the U.S. stock market, consistently outperforming other investment approaches. This strategy involves buying stocks or other securities that have had high returns over the past three to twelve months and selling those that have had poor returns over the same period. The iShares Edge MSCI USA Momentum Factor ETF (MTUM) is a prime example of this strategy's effectiveness, growing to $10 billion in assets since its 2013 launch by consistently beating the S&P 500 index.

Key Aspects of Momentum Investing

  1. Relative Momentum: Compares performance across sectors to identify the strongest performers.
  2. Absolute Momentum: Ensures selected sectors are not trending downward, switching to bonds for safety when necessary.

This dual approach aims to maximize returns while minimizing losses, particularly effective during market transitions and downturns.

Performance Metrics

  • Momentum Strategy: 11.65% average annual return
  • S&P 500: 8.32% average annual return

The momentum strategy has shown particular strength in years when the broader market was mediocre, such as 2004, 2005, 2007, 2014, and 2016.

Notable Momentum Stocks

Current market leaders dominating momentum portfolios include Amazon (AMZN), Microsoft (MSFT), Netflix (NFLX), Intel (INTC), Visa (V), Mastercard (MA), and Boeing (BA). These stocks exemplify the characteristics of momentum investing, showing robust recent performance and strong upward trends.

Risk Management

While momentum investing can yield high returns, it's not without risks. During the 2008 financial crisis, the MSCI USA Momentum Index fell 40.9%, compared to the broader market's 37.1% decline. However, the strategy's ability to adapt to new market leaders allows for potential recovery and long-term outperformance. It's crucial for investors to employ risk management techniques, such as stop-loss orders and diversification, to mitigate the impact of unforeseen market downturns.

Recent Trends

In 2024, momentum stocks significantly outperformed other factors, with the strongest performers up 58% compared to the S&P 500's 23% gain. This outperformance underscores the continued relevance of momentum strategies in the current market environment. Factors contributing to the resurgence of momentum investing include technological advancements, market sentiment, and macroeconomic factors.

For investors looking to capitalize on momentum, consider ETFs like MTUM or individual stocks showing strong recent performance and upward trends. However, be prepared for potential volatility and the need to actively monitor and adjust holdings as market dynamics shift. Implementing a disciplined investment approach and remaining adaptive will be key to harnessing the power of momentum investing effectively.