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Fundamental Factors of Investing Part 4: What is the Momentum Factor?

Tyler and Jordan review the “Momentum Factor” in our fourth and final installment of the fundamental factors of investing. Momentum investing is a strategy that seeks to profit from the continuance of an existing market trend. This trading strategy centers around investors buying stocks that are already going up and selling stocks that are falling. The largest ETF by assets under management (AUM) for momentum investing is the iShares Momentum factor ETF which analyzes stock prices, adjusted for volatility, over the past 6 and 12 months.

Momentum is about price and price can tell a story about how investors sentiment stands for a certain security or the market. One potential issue with using price as your only guide is that momentum can change very quickly, and investors need to have a set of rules in place to follow including rebalancing rules to account for frequent changes in momentum trends. It is best to use these strategies that have frequent rebalancing and turnover in the correct type of accounts as turnover and realized sell activity can cause tax consequences in taxable accounts.

Tyler and Jordan conclude with how LVM uses the momentum factor, which focuses on momentum in analysts’ earnings and revenue estimate trends.


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