The aim of investing in momentum stocks is to profit from positive price movements. This moneyland.ch guide answers the most important questions about investing in momentum stocks.
Investors understand that there is no way to predict the future performance of stocks and other securities. Those looking for points of reference can only look back at past returns for clues. Investors who opt for momentum assets place a strong focus on recent historical developments.
What is a momentum stock?
Momentum is an indicator used in the technical analysis of stocks which reveals the speed and dynamic of developments in a stock’s price during the recent past. In other words: The momentum shows how fast and how strongly a stock’s price has climbed or fallen over a specific period.
Momentum is calculated by finding the difference between a stock’s current price and its price at a specific time in the past, and then dividing the difference by the past price. Normally, the resulting quotient – the momentum rate – does not venture far from zero.
Momentum can be positive or negative. Normally, the term momentum stock is used for stocks with exceptionally high positive momentum rates. Investors who focus on momentum stocks hope that the performance will continue on its positive trajectory in the future.
How does the momentum investment strategy work?
The momentum strategy follows a very simple principle: You buy stocks when their prices are climbing, and sell them again as soon as possible when a downward cycle begins. The basic concept is to profit from price gains as much as possible. That requires analyzing stocks as precisely as possible and reacting to trends early on. You can find more information about the momentum strategy in the guide to investment strategies.
Are there indexes that track momentum stocks?
Constantly analyzing, buying, and selling individual stocks is not a must for building and maintaining a momentum portfolio. Financial services provider MSCI publishes momentum-focused versions of its global and national stock market indexes and subindexes. Examples include the global stock indexes MSCI World and MSCI ACWI Index. The momentum versions of these indexes are the MSCI World Momentum Index and the MSCI ACWI Momentum Index respectively.
Table 1: The ten stocks with the heaviest weighting in the MSCI World Momentum index
| Stock | Industry sector | Country | Index weighting MSCI World Momentum index |
Index weighting MSCI World |
|---|---|---|---|---|
| Nvidia | Electronics, semi-conductors | USA | 8.69% | 4.16% |
| Meta | Internet, software | USA | 5.49% | 1.59% |
| Amazon | Retail | USA | 4.82% | 2.52% |
| Eli Lilly and Company | Pharmaceuticals | USA | 4.65% | 1.02% |
| Broadcom | Semi-conductors | USA | 4.57% | 0.91% |
| Microsoft | Internet, software | USA | 4.39% | 4.50% |
| Novo Nordisk (B) | Pharmaceuticals | Denmark | 3.02% | 0.68% |
| Alphabet (A) | Internet, software | USA | 2.66% | 1.57% |
| Alphabet (C) | Internet, software | USA | 2.39% | 1.38% |
| Toyota | Automobiles | Japan | 1.58% | 0.35% |
Source: Index publisher. Date of publishing: May 31, 2024. Date of recording by moneyland.ch: June 24, 2024.
How do index publishers select momentum stocks?
The selection and weighting of stocks in MSCI’s momentum indexes is based on a momentum scoring system. This score is based on the performance of stocks over the past six and twelve months. The companies in the base index – the MSCI World index in the case of the MSCI World Momentum Index – are ranked based on their momentum scores. Not all of the stocks in the base index qualify for inclusion in the momentum version. For example, only 345 of the 1464 stocks included in the MSCI World are included in the MSCI World Momentum Index, and only 489 of the 2837 stocks in the MSCI ACWI Index are included in the MSCI ACWI Momentum Index (as per May 2024).
Which ETFs can I use to invest in momentum stocks?
Currently, Swiss investors can choose between two passively managed exchange-traded funds (ETFs) that invest in the MSCI World Momentum Index (as per June 2024). Additionally, there is also an actively managed ETF – the Vanguard Global Momentum Factor ETF – that invests in its own selection of stocks rather than tracking a stock index.
Table 2: ETFs that invest in global momentum stocks
| ETF | ISIN | Fund domicile |
TER | Dividends | Replication |
|---|---|---|---|---|---|
| MSCI World Momentum Index | |||||
| MSCI World Momentum Index (USD) (TRN) |
IE00BL25JP72 | Ireland | 0.25% | Accumulating | Physical |
| iShares Edge MSCI World Momentum Factor UCITS ETF (Acc) |
IE00BP3QZ825 | Ireland | 0.30% | Accumulating | Optimized Sampling |
| No index | |||||
| Vanguard Global Momentum Factor ETF | CA92207T1049 | Canada | 0.47% | Distributing | No information |
Source: ETF managers. Date: June 24, 2024.
In addition to global stock ETFs, there are also numerous ETFs that invest in national and continental stock indexes. However, there currently are no ETFs that invest specifically in Swiss momentum stocks.
How can I invest in an ETF?
ETFs are traded on stock exchanges just like the stocks of companies. All you need in order to buy shares in an ETF is a stock brokerage account with a bank or other stock broker. Pay attention to these possible costs: Banks may charge brokerage fees when you buy and when you sell your shares. You pay Swiss stamp duties, which are the same regardless of which Swiss bank you use. Most banks also charge you custody fees for holding your ETF shares.
What are the risks of investing in momentum ETFs?
Investing in momentum stock ETFs involves several risks:
How profitable are momentum stocks?
A historical performance comparison of the MSCI World index and the MSCI World Momentum Index shows that the momentum index has performed better than the base index over the long term (see Table 3). The average annual performance of the momentum version has been higher than that of the standard MSCI World index over both five-year and ten-year terms.
Table 3: Annualized performance of the MSCI World Index and the MSCI World Momentum Index
| Time period | MSCI World | MSCI World Momentum Index |
|---|---|---|
| 5 years (2019-2024) | 13.31% | 13.73% |
| 10 years (2014-2024) | 9.71% | 12.26% |
Source: Index publisher. Date of publishing: May 31, 2024. Date of recording by moneyland.ch: June 25, 2024.
But Table 4 shows that performance in individual years can be very different from long-term performance. Last year, the stock market as a whole, as tracked by the MSCI World, delivered much better returns than the momentum version of the index. That was also the case in 2016, 2019, and 2021.
Table 4: Returns by calendar year
| Year | MSCI World | MSCI World Momentum Index |
|---|---|---|
| 2014 | 5.50% | 7.03% |
| 2015 | -0.32% | 4.54% |
| 2016 | 8.15% | 4.75% |
| 2017 | 23.07% | 32.59% |
| 2018 | -8.20% | -2.38% |
| 2019 | 28.40% | 28.26% |
| 2020 | 16.50% | 28.70% |
| 2021 | 22.35% | 14.95% |
| 2022 | -17.73% | -17.34% |
| 2023 | 24.42% | 12.25% |
Source: Index publisher. Performance figures show the performance in US dollars. Date of publishing: May 31, 2024. Date of recording by moneyland.ch: June 25, 2024.
Important: It is always impossible to accurately predict returns, even with the help of historical price developments. As a general rule, a widely diversified portfolio forms the basis of long-term investment success.
Note: The information provided in this article is for educational purposes only, and should not be considered investment advice. moneyland.ch does not accept any liability.
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