Multi-year ETF Momentum

Do U.S. equity exchange-traded funds (ETF) exhibit long-term momentum? In their October 2019 paper entitled “ETF Momentum”, Frank Li, Melvyn Teo and Chloe Yang investigate future performance of U.S. equity ETFs sorted on multi-year past returns. Each month starting August 2004, they:

1. Sort selected ETFs into tenths (deciles) based on returns over the past two, three or four years, with focus on three years.
2. Reform an equal-weighted (EW) or value-weighted (VW) portfolio that is long (short) the decile with the highest (lowest) past returns, with focus on value-weighted.

They then evaluate performances of deciles and long-short portfolios based on raw return, 4-factor (adjusting for market, size, book-to-market and momentum) alpha and 5-factor (replacing momentum with profitability and investment) alpha. Using monthly returns, market capitalizations and net asset values for all U.S. equity ETFs with capitalizations greater than $20 million and share price greater than one dollar during August 2000 through June 2018, they find that: (more…)