Empirical evidence on the profitability of momentum trading strategies using ETFs

Susana Yu, Gwendolyn Webb

Research output: Contribution to journalArticlepeer-review

Abstract

Purpose: We extend empirical evidence on the profitability of momentum trading to the realm of plain-equity ETFs. Design/methodology/approach: We employ several ranking measures used in prior research, and for each we apply a traditional ranking based on total return, and a variation based only on the capital gain/loss portion of return. Findings: While we find that past momentum is not a strong predictor of future performance in our overall sample period, 2007 to June 2018, we find that the percent off 52-week high price results in positive performance in the recovery years following the financial crisis of 2008–2009. Research limitations/implications: Our study is limited by the availability of ETF experience and data, and our test period covers just 2007 through June 2018. This period includes the financial crisis of 2008–2009, which previous research finding is associated with the momentum strategy's loss of profitability. When we exclude that period, we find evidence of a profitable momentum strategy based on the measure of percent off 52-week high price, enabling us to reject the null hypothesis that the momentum trading strategy is no longer profitable. Practical implications: It is profitable based on both return measures used in the rankings. Our finding of a profitable momentum trading strategy suggests that the null hypothesis that the momentum strategy is no longer profitable can be rejected. Originality/value: While perhaps not so strong as to reject the efficient markets hypothesis fully, our empirical findings are more consistent with a behavioral explanation and a market inefficiency. In view of the relative ease and low transactional costs of trading in ETFs, the markets have yet another opportunity to recognize an apparent mispricing and employ arbitrage based on it. To the extent that the relative ease of trading in ETFs makes momentum strategies easier to employ, the momentum anomaly might still be expected to disappear in an efficient market.

Original languageEnglish
Pages (from-to)1321-1341
Number of pages21
JournalManagerial Finance
Volume46
Issue number11
DOIs
StatePublished - 16 Jun 2020

Keywords

  • Anchoring bias
  • ETF
  • Factor models
  • Financial crisis
  • Market efficiency
  • Momentum trading

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