Stock Strategist (ETF Edition): Momentum Often Loses Steam in Practice

[Morningstar Logo]( [Company Site]( [Company News]( [Membership]( [Portfolio]( [Stocks]( [Options]( [Funds]( [ETFs]( [Markets]( [Tools]( [Personal Finance]( [Discuss]( Stock Strategist (ETF Edition) Momentum Often Loses Steam in Practice Momentum may not work as well in practice as on paper, but well-constructed momentum funds still have a good chance to beat the market. [tab_bar] by Alex Bryan, CFA | 10/21/2020 2:30:00 PM Momentum investing is sound in theory but often disappoints in practice. This strategy is based on the tendency for recent performance to persist in the short term. On paper, simple momentum strategies that target stocks with strong returns over the past year seem to work well. But they ignore real-world frictions, like trading costs and taxes, and often look quite different from momentum funds investors can buy. While momentum has continued to work on paper in recent years, most broad large- and mid-cap U.S. momentum funds have underperformed the Russell 1000 Growth Index. (This is an appropriate benchmark because most momentum funds have a growth tilt). And though few of these funds have been around for a decade, none has managed to beat that benchmark over that horizon. Momentum investing can succeed in practice, but portfolio construction choices and fees matter--a lot. The best funds balance transaction costs against momentum style purity, effectively capture the momentum effect documented in the academic litera­ture, and consider risk. To read more, click [here](. Sponsored Links [Buy a Link Now]( Podcast: Investing Insights From Morningstar.com Listen to a roundup of the latest videos featured on Morningstar.com [in this podcast]( available through iTunes. Free Issue | Morningstar's Stock Newsletter >> Morningstar StockInvestor is celebrating more than 10 successful years of high-quality stock investing. Its two real-money portfolios have outperformed the S&P 500 since 2001. [Get new ideas for the core of your stock portfolio.]( Search Most Recent Articles [Notable Earnings This Quarter]( [Retirement Income: Assessing the Odds]( [How to Pay Down Debt]( Latest Analyst Reports [Deere & Co]( [The Travelers Companies Inc]( [Lockheed Martin Corp]( [IQVIA Holdings Inc]( [VF Corp]( [Eaton Vance Dividend Builder A]( [Transamerica Short-Term Bond A]( ABOUT OUR EMAIL To unsubscribe and update your preferences, go to our [email newsletter page](. All subscription changes will take effect within one business day. If you have questions about Morningstar.com or your membership, send a note to premium@morningstar.com. ABOUT OUR PRIVACY POLICY Please [click here]( to learn about Morningstar's privacy policy. (c) Copyright 2020. Morningstar, Inc. 22 W. Washington Chicago, Illinois, 60602 All rights reserved.