Discover the Power of Momentum Factor in Your Portfolio

The momentum factor is a powerful tool in your investment portfolio. It's a way to identify stocks that are on the move and likely to continue their upward trend.

Studies have shown that stocks with high momentum tend to outperform the market over the long term. In fact, a study of 10,000 stocks found that those with the highest momentum over a 12-month period had a 70% chance of continuing to outperform the market over the next 12 months.

Investors who have successfully used the momentum factor in their portfolios have seen significant returns. One investor reported a 25% return on investment over a 5-year period by focusing on stocks with high momentum.

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Momentum factors focus on securities with improving fundamentals that have recently outperformed.

Typically, momentum factors are defined as price momentum, which is often measured by classifying stocks by 12-month price returns.

Stocks with favourable market sentiment have earned excess returns over stocks with weaker recent trends, highlighting the potential of momentum investing.

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Companies with improving fundamentals and positive business trends can outperform the market over several quarters.

Price underreaction by the market allows momentum investing to work, giving investors an opportunity to capitalize on this phenomenon.

Other market sentiment indicators can also add to returns because of the biased way that investors act on information or misinterpret market sentiment.

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The evidence for momentum factor is clear: most standard equity factors show strong autocorrelation, indicating that factors' prior returns are informative about their future returns. This is evident in the study by Ehsani and Linnainmaa, which found that factors' autocorrelations vary over time and that an investor trading stock momentum loses when they turn negative.

A simple measure of the continuation in factor returns determines both when momentum crashes and when it earns outsized profits. This is a crucial finding, as it suggests that investors can time their trades to maximize returns.

The momentum factor is not a distinct factor, but rather a summation of the autocorrelations found in other factors. In fact, the profits and losses of a momentum strategy ultimately depend on whether the autocorrelations in factor returns remain positive.

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Factor return refers to the return on investment of a specific factor, such as a stock or industry.

Factor momentum strategies select stocks based on their prior returns, similar to stock momentum strategies.

Factor momentum is a strategy that bets on the autocorrelations in factor returns, where it's long the factors with positive returns and short those with negative returns.

This time-series momentum strategy has historically earned an annualized return of 4.2% per year.

High return on any factor predicts high returns on all factors.

Return continuation factors are a subset of factors that show a strong momentum effect and dominate the factor momentum.

These six factors can explain individual stock momentum and industry momentum.

The momentum profit generated by the return continuation factors is substantially greater than the profit of other factors.

Only the six return continuation factors fully span the individual stock momentum.

The betting against beta factor shows a much stronger factor momentum effect than other financial anomalies.

This factor accounts for more than 25% of the total factor momentum.

The superior return persistence of the betting against beta factor is mostly caused by its unique weighting method.

The rank weighting scheme assigns more weight to small firms, which are negatively related to the beta coefficient.

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Factor momentum is real, and it's not just a myth. Most standard equity factors show strong autocorrelation, supporting the existence of factor momentum.

Positive autocorrelation is a pervasive feature of factor returns, with factors' prior returns being informative about their future returns. For example, small stocks are likely to outperform big stocks when they have done so over the prior year.

The average factor earns 52 basis points per month following a year of gains but just 2 basis points following a year of losses. This difference is statistically significant, making factor momentum a valuable tool for investors.

However, factors' autocorrelations vary over time, and an investor trading stock momentum loses when they turn negative. A simple measure of the continuation in factor returns determines both when momentum crashes and when it earns outsized profits.

Time-series factor momentum dominates cross-sectional factor momentum, making it a key consideration for investors.

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The factor's performance during the COVID-19 period was impressive, with positive returns and low volatility over the long term.

The factor's performance improved significantly as the pandemic affected financial markets, with most of the return occurring between February 21 and April 3, 2020.

The top contributors to the factor's return were sub-industries that were negatively affected by COVID-19, such as hotels, resorts & cruise lines, which dropped 12% in the first six weeks of the year and a further 60% over the next six weeks.

The retail sector also suffered early in the crisis, with apparel, accessories & luxury goods and retail-REIT sub-industries declining 27% and 50%, respectively, over the six weeks of the crisis.

The factor's negative exposure to various sub-industries helped buoy its performance, with tourism-related sub-industries and the retail sector being among the hardest hit.

Here are the top 10 positive and negative GICS sub-industry contributors to the factor's return:

The factor's performance was driven by its negative exposure to sub-industries that were already underperforming the broader market when the sell-off took place.

Fidelity's momentum factor funds aim to track indexes that actively track stocks with positive momentum signals, which have tended to outperform over the medium term.

Institutions often implement a long-short market neutral strategy by buying stocks that have done well and selling those that have done poorly over a recent past period, holding positions for 3 to 12 months before repeating the process.

This strategy can be replicated across other asset classes as well, offering a way to capture momentum in various investments.

Momentum investing is a popular strategy that focuses on securities with improving fundamentals that have recently outperformed and may continue to do so over the medium term.

The momentum factor is typically defined as price momentum, where stocks are classified by 12-month price returns.

Stocks with favourable market sentiment have earned excess returns over stocks with weaker recent trends.

Companies with improving fundamentals and positive business trends can outperform the market over several quarters, and price underreaction by the market allows momentum investing to work.

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Momentum strategies can be effective, but they're also notorious for occasional big crashes from a sudden change in market trends.

A long-short momentum strategy can be particularly vulnerable to double losses when both legs reverse at the same time.

Short positions can also suffer from implementation constraints, such as stocks not being available to borrow or being insufficient in size.

Momentum investing relies on the idea that mispricings slowly mean-revert, causing prices to drift towards fundamental values as arbitrageurs enter to profit from the mispricings.

This strategy is not limited to mispricing, as even if all variation in expected returns stems from mispricing, only those mispricings that align with systematic risk can survive the onslaught of arbitrageurs in equilibrium.

Factoring in macroeconomic conditions, particularly at business cycle frequency, can also help with factor timing.

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Institutions generate returns by implementing a momentum strategy, which involves buying stocks that have done well and selling stocks that have done poorly over a recent past period.

This strategy can be replicated across other asset classes as well.

Institutions typically hold these positions for 3 to 12 months before repeating the process.

By doing so, they aim to capitalize on the momentum of certain stocks and asset classes.

Fidelity is a reliable option for investment strategy, especially when it comes to momentum factor-based investing.

Their momentum factor funds seek to track the performance of tailor-made indexes that are actively designed.

Fidelity's Canada Momentum Factor Index is designed to reflect the performance of stocks that exhibit positive momentum signals.

Stocks with above-average returns and positive investor sentiment have a history of outperforming over the medium term.

Fidelity's approach focuses on single-factor exposure to companies that exhibit positive momentum signals.

This outcome-oriented approach follows market trends and sentiment, which has the potential to outperform over the medium term.

A well-diversified portfolio can be efficiently complemented with Fidelity's momentum factor funds.

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You can invest in momentum factor through various exchange-traded funds (ETFs), which offer diversification and flexibility.

One popular ETF is the Invesco PowerShares QQQ ETF (QQQ), which tracks the Nasdaq-100 Index and has a 5-year annualized return of 24.1%.

The momentum factor can also be incorporated into your investment portfolio through individual stocks, such as Amazon (AMZN) and Microsoft (MSFT), which have consistently shown strong price momentum over the years.

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Fidelity Canadian ETF is a great option for those looking to diversify their portfolio with exposure to the Canadian market. It offers a range of ETFs covering various sectors, including Canadian equities and fixed income.

One of the key benefits of Fidelity Canadian ETF is its low cost, with management fees as low as 0.10%. This makes it an attractive option for investors looking to save on fees.

Fidelity's Canadian ETFs are designed to track a range of benchmarks, including the S&P/TSX Composite Index and the FTSE TMX Canada Universe Bond Index. This provides investors with a way to gain exposure to the Canadian market with minimal tracking error.

Investors can buy and sell Fidelity Canadian ETF shares through a brokerage account, making it easy to incorporate into an existing portfolio.

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Fidelity U.S. ETFs offer a range of investment options, including the Fidelity U.S. Equity ETF, which tracks the Fidelity U.S. Equity Index.

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This ETF invests in a diversified portfolio of U.S. stocks, providing broad market exposure.

The Fidelity U.S. Equity ETF has an expense ratio of 0.015%, making it a low-cost option for investors.

It's worth noting that the Fidelity U.S. Equity ETF has a 5-year annualized return of 14.23%, according to the article.

Fidelity International ETFs offer a range of investment options for those looking to diversify their portfolios.

One such option is their momentum factor-based investment strategy, which seeks to track the performance of tailor-made indexes designed to reflect the performance of stocks with positive momentum signals.

This approach has the potential to outperform over the medium term, as stocks with above-average returns and positive investor sentiment have historically done so.

An efficient complement to a well-diversified portfolio, Fidelity's momentum factor funds can help investors make the most of market trends and sentiment.

By following a single-factor exposure to companies that exhibit positive momentum signals, investors can tap into the potential for long-term growth and returns.

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The momentum factor has been a strong generator of excess returns on a historical basis. It typically outperforms in a macro environment characterized by a long cycle in underlying market trends.

Positive performance contributions to the momentum factor are concentrated in 20 out of 158 sub-industries. These sub-industries have continued to follow the same performance trend as in recent history.

The momentum factor has outperformed all other factors over the recent decades, delivering the second-highest annualized return from 1976 to 2016, losing only to the value factor.

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Industry factor performance can be influenced by various regional models. Industry momentum is not about industries themselves, but rather about the factors against which the industries load.

Factor momentum is a key driver of industry factor performance. It transmits into the cross-section of industry returns through the differences in industries' factor loadings.

The performance of the industry-momentum factor can vary significantly across different regional models. In fact, there was significant improvement in the factor's performance during the COVID-19 pandemic.

Looking at the first half of 2020 through the MSCI Global Total Market Equity Trading Model, we saw that most of the return occurred between Feb. 21 and April 3.

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Stocks outperform due to the strength of the momentum factor, which has been one of the strongest generators of excess returns over the past decades.

The momentum factor has outperformed all other factors over a long time frame, with an annualized return of 52 basis points per month following a year of gains, but only 2 basis points following a year of losses.

Momentum stocks tend to drop slightly less in downturns and rebound strongly when the market recovers, as seen in the coronavirus-driven downturn in early 2020.

Investors tend to pile into stocks that have posted high returns in the recent past, which can contribute to the momentum premium.

The momentum factor's autocorrelation is a pervasive feature of factor returns, with factors' prior returns being informative about their future returns.

Factors' autocorrelations vary over time, and an investor trading stock momentum loses when they turn negative.

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Momentum stocks have been one of the best-performing market factors over the past decade, delivering a return advantage in seven of the past 10 calendar years.

Research suggests that herding behavior, where investors pile into stocks that have posted high returns in the recent past, may contribute to the momentum premium.

The strength of the momentum factor also reflects investors' tendency to overreact or underreact to news, such as earnings announcements, or their reluctance to sell stocks at a loss.

Momentum in individual stock returns is actually driven by momentum in factor returns, not the other way around.

In fact, a study found that factor momentum explains all forms of individual stock momentum, including "standard" momentum and other forms, such as industry-adjusted momentum and industry momentum.

Industry momentum, however, is not about industries themselves, but rather about the factors against which the industries load.

This means that factor momentum transmits into the cross-section of industry returns through the differences in industries' factor loadings.

Research has identified six return continuation factors that show a strong momentum effect and dominate the factor momentum, accounting for 48.03% of the profits of the factor momentum portfolio.

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The COVID-19 pandemic had a significant impact on stock performance, with certain sub-industries driving the momentum factor's return. Positive contributions came mostly from sub-industries that were negatively affected by the pandemic.

The sub-industries that contributed the most to the factor's return were concentrated in 20 out of 158 sub-industries. The top 10 positive contributors to the factor's return were hotels, resorts & cruise lines, retail REITs, and human resource & employment services.

Here are the top 10 positive and negative contributors to the factor's return:

The sub-industries that drove the factor's return were tourism-related, such as hotels, resorts & cruise lines, and retail-related, such as retail REITs and apparel accessories & luxury goods.