This could be the right time to buy a momentum fund

A long line of academic research going back decades has shown that momentum investing has consistently beaten the market.

You know how you supposedly "can't beat the market" over the long term?

Turns out you can.

Momentum investing, which typically means buying only the stocks that have performed well over the previous three to 12 months, has been shown to beat the market indexes persistently over the very long term, typically by huge amounts.

But one feature of so-called momentum investing is the risk of occasional, sharp downturns, when suddenly the winning high-momentum stocks underperform the market. Fear of such momentum downturns are a reason so many are afraid to invest in momentum funds, despite the long-term profits. But once it is underway, it is typically a very good time to get on board.

One is underway now. So if you accept the data underpinning momentum investing, and you are willing to take the long view, now is an excellent time to take a closer look.

"Momentum is a foundational factor in equity markets," wrote Guido Baltussen, M. Sipke Dom Bart Van Vliet and Milan Vidojevic of the Erasmus School of Economics in Rotterdam, in the Netherlands, and Northern Trust Asset Management in a recent academic paper reviewing all the data.

There is "robust empirical support for the momentum factor over domestic and global stock markets spanning up to 150 years of data," they wrote. In the U.S. market they argued momentum returns have been "strong and consistent" going all the way back to 1866, with the highest momentum stocks beating the lowest momentum stocks by an absolutely staggering 9 percentage points, on average, per year over that period. Between 1965 and 1989 the 20% of stocks with the highest momentum beat those with the lowest by an average of 11 percentage points a year. Between 1990 and 2024: 7.9 points. In 31 international countries the findings are similar, though they vary by market: Since 1990 they found the Portuguese stock market showing the most momentum and the Japanese showing the least.

For this study they defined momentum as the price movement of the stock over the preceding 12 months, excluding the most recent month.

Their paper is merely the latest of a long line of academic research going back decades showing that momentum has beaten the market, persistently. The most influential research was from Jagadeesh and Titman, two finance professors at UCLA's Anderson School of Management, in1993, but earlier papers date back at least to the 1960s.

According to the financial-data firm MSCI, since the end of 2000 - just over a quarter-century ago - their standard index of U.S. stocks has generated total shareholder returns of 815%. One dollar got you nine and change if you left it there.

Their momentum index: 1,395%. To put it another way, momentum investing earned you 70% more over that period than the index.

One of the oldest momentum ETFs in the U.S. market is the Invesco S&P Midcap Momentum ETF XMMO, which was launched in early 2005. If you had invested $10,000 in the fund at the launch, using a tax-sheltered account such as an IRA and reinvesting the dividends, today you'd have $120,000.

If you had invested that money instead in a basic S&P 400 midcap ETF at the same time, such as State Street S&P 400 Midcap SPDR MDY, you'd have just $73,000. Your investment gains would have been a little over half as much.

The midcap momentum fund earned an average of about 11.4% a year, comfortably beating the 9% annual return of the midcap index.

In 2013, Blackrock's iShares launched the iShares MSCI USA Momentum Factor ETF MTUM. Since then the fund has earned an average annual return of 16.2%, almost two clear points ahead of the S&P 500 SPDR's SPY 14.4%, and more than two full percentage points ahead of the overall U.S. market, as measured, for example, by the Vanguard Total U.S. Market ETF VTI.

Academics say they cannot work out why "momentum" as a so-called "factor" keeps working. This may be because academics are trying to use a theory known as the "efficient market hypothesis" or EMH, which assumes markets - and by extension, market participants, i.e. humans - are rational and sensible, especially in crowds.

A cynic might suggest they try replacing the EMH with the SMH - the Stupid Monkey Hypothesis. Human beings are chimpanzees, and are therefore pack animals, and the average IQ is 100, meaning half of all people have an IQ lower than 100. (OK, yes, I know technically chimpanzees are apes, not monkeys.)

Humans are so hardwired to run in packs, and social contagion is a major phenomenon, especially in the modern internet age, when mass delusions, mass hysterias and mass panics are so commonplace as to be boring and predictable. When certain stocks have been rising for a while, all sorts of "Number Go Up" bros and fund managers jump on board, driving them even higher. This carries on until the occasional, inevitable reckoning, when the same chimpanzees all panic and try to sell at the same time.

Using MSCI data going back to 2000, I looked for momentum reversals of 5% or more (meaning that the MSCI U.S. Momentum Index, divided by the standard MSCI U.S. Momentum Index, fell by at least 5%, using month-end data). Before the current reversal, I found 11. The average lasted about 7.7 months, and during that time momentum fell 11% when measured against the standard index.

The worst ones seem to happen during bear markets, when the winning stocks of the preceding boom get trashed. This means that during bear markets momentum investors can sometimes suffer a double whammy, as their funds fall even further than the market.

There have been six preceding momentum reversals where the momentum index underperformed the broader index by 10 percentage points or more. The biggest, during the global financial crisis, lasted 19 months from 2008 through 2010 and saw an underperformance of 22%.

Where does the current reversal measure up? Since the end of last month, the MTUM has underperformed the VTI by 8.5 percentage points. Since momentum strategies peaked about a month ago, it has underperformed by 10 points. Measured through last Thursday, when momentum (so far) seemed to bottom out in relative terms, the MTUM had underperformed the VTI this month by 12 points.

That is about in line with the average, although so far this reversal has been very short. Of the previous 11, four lasted four months or less and two lasted just two months.

The fundamental takeaways are that the same argument which supports index funds and stock-market investing - namely that they have worked in the past - supports investing in momentum. The future may look like nothing like the past, but almost everyone is betting that it will. Momentum investing has paid huge dividends over time, and it is strongly endorsed by academic research, but the returns can be lumpy - you will occasionally get a very nasty spell of underperformance.

How much of your portfolio you want to allocate to momentum is going to be a judgment call. But if you assume that momentum will keep working long term, while you also worry about the occasional reversals, a reversal is a positive, not a negative. It should be both mathematically and emotionally better to invest during one, such as now.

-Brett Arends

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July 22, 2026 12:33 ET (16:33 GMT)

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