There are a number of compelling academic studies including the Jegadeesh and Titman report published in the Journal of Finance which showed a portfolio of momentum stocks outperforms the broad-based SP500 index. Other studies demonstrate it’s not required to put your entire portfolio into momentum stocks if you want outperformance. Just having portfolio exposure works too.
One of my go-to vehicles if I want to spread my risk across many momentum stocks is MTUM, the Ishares ETF. The chart below is a 5 year look at the ETF. In the upper pane is RSI which was massively overbought but after the recent double digit pullback, has been reset, is above 50 and rising. In the middle pane is price which is above both its blue uptrend line and the rising 200 day moving average. I would be remiss if didn’t mention, it is within 9 cents of breaking out to new, all-time highs.
And if you are wondering how it has performed, the bottom pane is the ratio of MTUM against the SP500 index. When looking at ratios remember a rising line says the ETF is outperforming the US stock index. Pretty easy to see this momentum play does very well during uptrends, but loses more in downtrends so keep that in mind when investing. Over the last 5 years, MTUM has outperformed the index by more than 35%, a 6% annualized rate of return greater than the benchmark.