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Are U.S. Equity Momentum ETFs Working?

| | Posted in: Equity Premium, Momentum Investing

Are U.S. stock and sector momentum strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider five momentum-oriented U.S. equity ETFs with assets over $100 million, all currently available, in order of longest to shortest available histories:

  • PowerShares DWA Momentum Portfolio (PDP) - invests at least 90% of assets in approximately 100 U.S. common stocks per a proprietary methodology designed to identify powerful relative strength characteristics, reformed quarterly.
  • iShares Edge MSCI USA Momentum Factor (MTUM) - holds U.S. large-capitalization and mid-capitalization stocks with relatively high momentum.
  • First Trust Dorsey Wright Focus 5 (FV) - holds five equally weighted sector and industry ETFs selected via a proprietary relative strength methodology, reformed twice a month.
  • SPDR Russell 1000 Momentum Focus (ONEO) - tracks the Russell 1000 Momentum Focused Factor Index, picking U.S. stocks that have recently outperformed.
  • First Trust Dorsey Wright Dynamic Focus 5 (FVC) - similar to FV but with added risk management via an increasing allocation to cash equivalents when relative strengths of more than one-third of the universe diminish relative to a cash index, reformed twice a month.

We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We use two benchmark ETFs, iShares Russell 1000 (IWB) and iShares Russell 3000 (IWV), according to momentum fund descriptions. Using monthly returns for the five momentum funds and the two benchmarks as available through April 2020, we find that:

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