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A Framework for Evaluating Momentum Funds (Part 2)

We think that funds that account for risk, leave constraints aside, and account for momentum’s tendency to crash every so often are best-of-breed.

Ben Johnson 24.09.2020

In part 1, we looked at the selection universe and selection criteria when evaluating momentum funds. In this part, we will discuss the other aspects.

Weighting Criteria

Momentum ETFs take different approaches to sizing their positions. Most consider the strength of stocks’ momentum in assigning weights, but there are other criteria at play. Most of these funds anchor stocks’ weightings to their market cap, adding or subtracting from their allocation based on how they rank on the relevant momentum measures. Examples include iShares Edge MSCI USA Momentum Factor ETF (MTUM, listed in the U.S.)and Invesco S&P 500 Momentum ETF (SPMO, listed in the U.S.). Other funds take a more aggressive approach. For example, Principal Sustainable Momentum ETF (PMOM, listed in the U.S.)and Alpha Architect U.S. Quantitative Momentum ETF (QMOM, listed in the U.S.)both assign equal weights to those stocks with the strongest momentum characteristics.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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