This Momentum ETF Beats the Market Without the Magnificent 7: 17% Annual Returns
One benefit of writing publicly about investments is that readers occasionally suggest great investment ideas. This time, it’s an ETF—a momentum-based one. Previously, I shared what I believed to be the best momentum-based ETF in this post, but a reader suggested another ETF that has delivered even better performance. Case in point: as shown in the chart below, my suggested momentum ETF (in blue) has outperformed the S&P 500 ETF since 2016, while the reader’s suggestion (in green) outperformed both my pick and the S&P 500 ETF over the same period!
For those unfamiliar with momentum investing, it involves buying stocks that are already trending. These stocks may sometimes appear overvalued, but research has shown they often deliver higher returns (here’s one well-known paper on the subject). Momentum is a short-term strategy, where positions are typically held for weeks or months. The goal is to ride the continuation of a stock’s uptrend and exit once the trend shows signs of reversal, locking in profits.
Momentum investing is inherently more active compared to growth or value strategies, making it ideal to delegate to a fund manager or ETF provider to handle the trades. This relieves investors of the effort and time required to execute the strategy. Both momentum ETFs in this discussion charge a total expense ratio between 0.13% and 0.39%, which is reasonable for a high-turnover strategy, especially considering they have delivered annualized returns exceeding 17% since 2016. This performance more than justifies the fees.