2017 has been a momentum driven year as one can see from above chart. MTUM (red) is the momentum ETF and it did the best even better than RPG (Yellow) and our portfolio (Blue).

More recent articles on this matter:


Why don’t skilled portfolio managers exit momentum whenever the trade becomes too ‘crowded’ and crash risk rises? The momentum strategy is most likely to crash when past returns are high – exactly the time when a manager is most able to attract funds and have a high proportion of assets under management above the fee generating high-water mark. The risk-shifting convex payout structure of incentive fees combines with the return-chasing behaviour of future investors to provide incentives for fund managers who have a finite horizon to remain in a crowded momentum strategy.

Since most hedge funds are momentum chasers, returns have been poor this past decade. Personally, I use it sparingly, it works until some unexpected news comes out like a thunderbolt, then a crash occurs wiping out any excess returns.

The explanations are various, but the main idea is this.

Momentum works only if the factors that causes it stay in place.


  1. Momentum works with both value and growth investing but more commonly associated with growth stocks and sectors with high valuations and unproven business models.
  2. Value to growth style and back again rotation causes unpredictable changes in directions
  3. Size rotation also can suddenly affect direction violently to small caps.
  4. USD cycles affects domestic to foreign market rotation ( this is our Domain)

but looking longer term Momentum, MTUM cannot beat the index, QQQ that’s doing the best( below)nasdaq

This is the reason why using individual stock for momentum fails.

Sudden gap downs.


I do agree with this paper, combining relative value with momentum is a great idea:


If value and momentum each on their own can give you market beating returns what happens if you combine value and momentum.

The paper also tested a combined value and momentum strategy with the following results:

You can clearly see that the combined portfolio (60% value 40% momentum) produces the highest percentage of positive returns, in both 1 year and 5 year periods with the best risk adjusted return (highest Sharpe ratio).

what about ising sector ETF’s for momentum?


What we can see is that while the 10-sector rotation method has been a generally profitable long/short strategy over the last 90 years, it has dramatically underperformed the single-stock momentum factor.

Over the full period, 10ROT only returned 3.72% per year

We believe that relative strength-based sector rotation strategies are popular because they have significant empirical evidence, follow a seductive narrative about business cycles, and are fairly simple to implement.

In this study, however, we find that momentum-based sector rotation strategies are largely explained by the momentum factor, with no significant novel or unique alpha contributed by the strategies themselves.

We generally find that as the number of sectors decreases – with the implementation moving further away from a traditional momentum implementation and increasing internal diversification – total return drops, as does drawdown.

However, volatility and drawdown reduction are not necessarily commensurate with return reduction. We can see – particularly in 1932 – that sector rotation is still susceptible to momentum crashes. Based upon this, we could argue that sector rotation dilutes momentum returns without significantly diluting the risks.