An easy way of explaining momentum investing is that it is the exact opposite of buy-and-hold. A momentum strategy includes holding positions for a matter of minutes up to a few days or perhaps weeks, but never for six months, a year or longer. International stocks, with their reputation for being more volatile than U.S. shares, make for strong momentum trading candidates. Better still is the fact that investors can use an array of ETFs to employ an international momentum trading strategy.
A key component of momentum investing, whether it is with U.S. or global ETFs, is trend recognition. At a basic level, there will be times when U.S. stocks are more coveted than their international peers. That provides for profit opportunities on the downside by shorting global ETFs as they lag U.S. equivalents. Conversely, investors can increase their profit potential by identifying trends that are favorable to global ETFs. Those trends can include rotation out of U.S. stocks, increased commodities demand and expectations for higher economic growth outside the U.S.
Use Momentum-Specific ETFs
Few investors ever describe an ETF as "momentum-specific," but there are a few that are constructed with capturing momentum in mind. One group of international ETFs that offers momentum exposure does so by using the relative strength index as a primary screening tool for holdings within the funds. RSI measures a security’s recent gains against its recent losses on a scale of 0-100. A key element of relative strength that is directly applicable to momentum investing is that securities can remain overbought or oversold for long periods of time.
Examples of ETFs that employ this strategy on a global level include the PowerShares DWA Emerging Markets Technical Leaders Portfolio and the PowerShares DWA Developed Markets Technical Leaders Portfolio.
Long High Momentum, Short the Laggards
An interesting way aggressive investors can potentially increase their profits is to screen global ETFs based on the most recent one-month momentum trends. From there, the top quartile would be purchased, while the bottom quartile would be sold short. That strategy was outlined using stocks in the academic paper "Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes," which evaluated this strategy from 1986 to 2007.
Emerging Markets ETFs
Emerging markets ETFs should be part of a global momentum trading strategy for at least two reasons. First, many emerging markets ETFs are noticeably more volatile than those funds focused on U.S., European or Japanese stocks. Second, trend identification is fairly easy with emerging markets ETFs. There are market environments when developing world stocks are strongly in favor and vice versa. Additionally, investors can use readily available and regularly published economic data to make momentum bets in either direction on emerging markets ETFs.
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