This article was originally published on ETFTrends.com.
One of the oldest investing maxims is “buy low and sell high.” If that conventional wisdom is to be believed, the momentum factor may seem counter-intuitive to some investors. After all, one of the basic premises of momentum investing is that a security that is in a strong uptrend can continue rising while a security in a pronounced downward spiral can continue falling.
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While it is widely held that factors, such as low volatility and value, are winners over long holding periods, data also suggest that, over time, momentum can outperform broader benchmarks. Still, a slew of widely held misconceptions exist to this day.
“The long-term success of the momentum factor seems to be a challenge to many observers,” said Cliff Asness of AQR Capital Management. “People say things like ‘momentum only works among small stocks’ or ‘momentum only works for going short, not long.’ These comments, which appear to be aimed at casting doubt on the implementability of momentum, seem to be spoken about more than written. There’s a reason for that. When you run the numbers, these statements are just not close to true.” 1
Another quibble momentum critics have is that momentum as an idea is great, but its real world applications can be disappointing. The ALPS Dorsey Wright Sector Momentum ETF (SWIN) is an exchange traded fund (ETF) that helps investors efficiently harness the power of momentum stocks under the umbrella of a single fund with promising real world results.
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