“Investing is simple: buy things that go up”.
Oftentimes, momentum ETFs will simply buy shares that have gone up in price and sell those that have gone down in price.
For example, if company XYZ’s share price goes from $5 to $10 in one year it would get a bigger position in a momentum ETF than a share that went from $5 to $4.
We note there is rigorous evidence which supports why, how and when momentum strategies can work. For example, these ETFs can take advantage of the ‘herd mentality’ bias of investors. Meaning, some investors (especially “traders”) buy things that go up in the hope that they’ll keep going up.
Final point: momentum strategies are often used ‘in addition’ with other strategies. For example, as a filtering process for other rules-based strategies.
