Momentum Fund: What It Means, How It Works

What is a Momentum Fund?

A momentum fund is an investment fund that invests in companies based on current trends in 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, but they require a high level of monitoring, as momentum factors can be short-term and cause directional changes. While momentum factors are considered in all types of active investment strategies, few funds focus exclusively on directional momentum.

Momentum Analysis

Momentum factors include price movement, revenue, and earnings. Momentum indices are created and widely used by momentum-focused exchange-traded funds (ETFs). These ETFs consider the one-year trailing performance returns of stocks in a targeted momentum index. Momentum indices also provide a momentum score based on fundamental characteristics like value, size, and quality. This score integrates fundamental analysis into the performance returns for additional input. Technically focused funds may invest based on technical indicators, like price breakouts.

Momentum analysis places a high emphasis on a stock’s market return. Many funds rely on past performance as the primary factor for inclusion. Positive performance is often generated by positive revenue and earnings compounding over time. However, investors should be cautious as these funds can be highly correlated to systemic risks and often follow market returns as well.

Investing in Momentum Funds

Momentum funds base their investment strategies on numerous factors. Therefore, investors must understand the fund’s investment philosophy and risks. Most funds focus primarily on a company’s past performance. Actively managed momentum funds rebalance quarterly, while passive momentum indices rebalance semi-annually. Frequent rebalancing helps align the strategy with its focus, resulting in high turnover and the utilization 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, including the iShares Edge MSCI USA Momentum Factor ETF, SPDR Russell 1000 Momentum Focus ETF, Invesco S&P Emerging Markets Momentum Portfolio, USAA MSCI USA Value Momentum Blend Index ETF, and the USAA MSCI International Value Momentum Blend Index ETF.