While deploying a momentum-based strategy can be challenging for individual investors, there are now several momentum ETFs available. However, many of these ETFs fail to outperform index returns, making it more practical for investors to simply buy the S&P 500 ETF.
Momentum capitalizes on delayed reactions and herd behavior among investors. We see this in daily life, such as when we choose a restaurant with rave reviews and long lines. A recent example in the stock market is Nvidia, where the AI narrative attracted investors, and as the share price climbed, more investors piled in, driving it even higher.
A common concern is the risk of a price collapse. That's why a systematic approach to taking profits and limiting losses is crucial for managing risk in momentum strategies.That said, I’ve found one superior momentum ETF that could be worth considering for investors seeking higher returns.
The momentum factor in stocks suggests that a stock that has risen in the past is likely to continue rising. This contrasts with the common belief that "what goes up must come down," often associated with the mean reversion effect. Both perspectives can be valid, but it depends on the time frame.
Finally Momentum typically operates as a short-term factor, lasting from weeks to months, whereas value investors who bet on mean reversion may need to wait years for a stock's price to recover.
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