By Debbie Carlson
Momentum funds have been a standout in this year's market -- but investors are only now taking notice.
One of the classic market factors, momentum seeks relative strength by buying market leaders in anticipation that they will remain leaders. Many momentum exchange-traded funds employ a fundamental strategy, overweighting companies with consistent earnings growth.
Among the biggest momentum ETFs, the $17.1 billion iShares MSCI USA Momentum Factor (ticker: MTUM), the $8.8 billion Invesco S&P 500 Momentum $(SPMO)$, and the $1.5 billion JPMorgan U.S. Momentum Factor $(JMOM)$ are all beating their respective indexes this year and on a three- and five-year annualized basis.
The iShares ETF is up 13.7% year to date, Invesco's ETF has gained 14.6%, and JPMorgan's ETF is up 7.1%. By comparison, the $608 billion SPDR S&P 500 ETF $(SPY.NZ)$ is up 3%, and the $1.8 trillion Vanguard Total Stock Market ETF $(VTI.AU)$ is up 2.6%.
Fund flows data for May from State Street Global Advisors show that momentum strategies took in $2.4 billion, the second-best month of inflows ever, and have seen flows of $5.7 billion in 2025.
Along with other classic factors -- value, size, yield, and quality -- momentum strategies are among some of the best-known "smart beta" ETFs that were all the rage a few years ago. Although their popularity has dwindled from their heyday, some of them, such as momentum, continue to quietly outperform. It has taken a mercurial market for some investors to realize it.
Momentum has been the dominant factor in the post-Covid market cycle, says Christopher Verrone, chief market strategist at Strategas Research Partners, and he expects the strategy's winning ways to continue. Industrials, financials, and technology are among the market-leading sectors that currently comprise the momentum factor.
"Momentum implies that you're owning the relative leadership, as opposed to trying to go bottom fishing or play catch up with some of the laggards," he says. "I don't think the market craves or demands that here. I think it craves the leaders."
Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, says momentum was the best-performing market factor in 2024 not just domestically, but also in non-U.S. developed markets and emerging markets.
Momentum factors are well suited for foreign markets, says Nick Kalivas, head of factor and equity ETF strategy at Invesco. "You want clear, sustained leadership and dispersion in returns; that's the environment where momentum can thrive," he says.
Because momentum follows trends, it's less affected by market cycles and can own defensive or growth stocks. It underperforms when markets are choppy and directionless -- and when market leadership suddenly changes, as it will hold previous winners until a true trend emerges.
"Momentum is really the life of the party. It shows up late, it's a lot of fun in the middle, and it stays too long," Kalivas says.
Momentum ETFs are based on an index, and holdings change only when they are rebalanced. That could cause their performance to lag behind in the short term if a trend takes off before the fund is rebalanced with the latest trend-following holdings.
Carlos Sanabria, an investment specialist at financial advisory SEIA, says the firm includes momentum funds, such as the JPMorgan fund, in its broader model portfolios. It uses factor funds as long-term holdings to enhance their large-cap allocation, rather than trying to use the funds to time the market. When choosing a fund, he says investors should make sure it has sector and industry diversification to avoid concentration.
"You don't want to end up with a portfolio of only healthcare stocks," he says.
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(END) Dow Jones Newswires
June 27, 2025 21:31 ET (01:31 GMT)
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