Hortense Bioy: Momentum is one of the best-known factors in investing. Momentum investing is about buying winning stocks, stocks that have done well in the recent past, and selling losing stocks, stocks that have done poorly. Academic research shows that stocks that have recently risen or fallen in price will continue that trend over the short-to-medium term, typically over six to 12 months. And over the long term, high-momentum stocks will outperform the market.
The idea is quite simple, but the implementation is difficult. And a badly-implemented momentum strategy can result in poor performance. Momentum is one of the most challenging factors to exploit.
One issue with momentum strategies is their transaction costs; they have relatively high-levels of turnover. Investors seeking to capture the momentum premium can turn to ETFs. But as always, it's important to understand the methodology that each fund uses to select its holdings.
