We all know that short-term investing is a no-no, as returns are often random over short periods, and we may end up buying high and selling low, right?
But Morningstar, a proselytizer of prudent money management, says short-term investing does have its merits. Still, that activity must be part of a long-term strategy, Daniel Sotiroff, senior manager research analyst for Morningstar, writes in a commentary.
“Time-tested long-term strategies exist that take advantage of short-term bets,” he said. “As with any great investment, the path to success requires a long holding period while weathering the ebbs and flows that result from these wagers.”
It’s not about buying stocks involved with hot new technologies or funds based on a specific theme, he said. And “performance-chasing is largely indefensible.”
However, “there is another side of performance-chasing that’s worth discussing,” Sotiroff said. That’s momentum investing.
“Buying stocks that have performed well recently, with the expectation that their outperformance will continue, is the basic premise behind momentum investing,” Sotiroff noted.
Momentum Investing: Risk and Reward
“Momentum strategies still bear some incremental risk, but that risk has been historically rewarded with market-beating performance over the long run.”
But he raises a caution flag. “The trick with momentum investing is harnessing the effect without giving in to the emotional whims that often accompany stocks with strong recent performance,” Sotiroff said.
That means investing in low-cost momentum exchange-traded funds that “adhere to a reasonable set of rules instead of relying on human discretion,” Sotiroff said.
He suggests iShares MSCI USA Momentum Factor ETF (MTUM) and its international sibling iShares MSCI International Momentum Factor ETF (IMTM). Both earn Morningstar’s third-highest rating of bronze.
The funds “use a repeatable process to build a long-term strategy around a series of short-term bets,” Sotiroff said.
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“MTUM and IMTM hold stocks with the strongest risk-adjusted price returns over the past seven and 13 months, and weight those stocks by a combination of their momentum and market cap.”
A rules-based approach has the advantage of “maintaining exposure to recent winners regardless of the stories behind the stocks or their lines of business,” Sotiroff said.
“MTUM and IMTM have diversification on their side. Both pull their holdings from a wide opportunity set.”
Sector & Country Weightings
He notes that “sector and country tilts are common, as these strategies need to place more weight on the best-performing segments to seize the momentum effect.”
In addition, fund portfolios are adjusted frequently “to maintain a tight focus on the most recent outperformers,” Sotiroff said. That can increase expenses.
To be sure, momentum funds perform best “when the market is stable and stocks move in a consistent direction, providing reliable signals to latch on to,” he said.
“Past winners won’t necessarily outperform when volatility increases or the market quickly changes direction.” Moreover, “outsize bets can help or hurt performance,” Sotiroff said.
“Like many factor ETFs, momentum ETFs like MTUM and IMTM require long holding periods to reap the rewards, and investors will likely have to endure some lumpy performance,” he said.
“They aren’t for everyone, but they’re one of the best ways to make short-term bets over the long term.”
MTUM had a five-year annualized return of 10.12% through Sept. 7, compared to a 12.03% return for the S&P 500. The fund has an expense ratio of 0.15%, which is quite low given its frequent trading.
IMTM had a five-year annualized return of 2.3% through Sept. 7 and has an expense ratio of 0.3%.
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Short-Term Investing Can be Part of Prudent Strategy - TheStreet
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