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As part of its family of smart beta ETFs, the i Shares Edge MSCI USA Momentum Factor ETF (NYSEARCA: MTUM) includes about 120 large and mid-cap companies in the MSCI USA Momentum Index, which ranks stocks according to price changes over the previous six and 12 months.The i Shares Edge MSCI International Momentum Factor ETF (NYSEARCA: IMTM) uses a similar methodology and holds about 250 stocks in developed markets outside the US, including Canada.
In March, the Canadian arm of Power Shares launched a tactical fund that uses these US-listed ETFs as its underlying holdings.
It was first documented in a 1993 paper suggesting you could generate excess returns by buying US stocks that performed well over the previous three to 12 months and selling those that performed poorly over the same period.
Later studies found that momentum also exists in international markets.
That means there's a "sweet spot" in the intermediate term.
Most academic definitions of momentum today include stock prices over the previous two to 12 months.
In 1999, Mark Carhart published a now famous paper arguing that outperforming mutual funds cannot be reliably identified in advance.
Carhart suggested fund managers who seem to have a "hot hand" are often just the lucky beneficiaries of momentum in stock returns.
In the US, Power Shares has the oldest family of momentum-based ETFs covering US equities (one for large and mid caps, another for small caps) and international equities (both developed and emerging markets).
The Power Shares DWA Momentum Portfolio (NASDAQ: PDP) holds about 100 US companies, with no individual stock making up more than 3% of the fund.
Some argue that momentum stocks are more likely to see sharp reversals as surging prices plunge back to earth.
If this is true, then investors are simply being compensated for accepting this additional risk.
He eventually added momentum to the factors identified by Fama and French to create the Carhart Four-Factor Model. Stock prices tend to revert to the mean over periods of several years - in other words, momentum isn't a long-term phenomenon.