Can Exchange Traded Funds be Used to Exploit Industry Momentum?

Abstract:     
There is much empirical evidence on the existence of an industry momentum effect, indicating that industries with relatively high past returns will continue to outperform, and industries with relatively low past returns will continue to underperform. These studies focus on industries that cannot be traded directly, which makes it difficult to exploit the industry momentum effect. We analyze the profitability of industry momentum strategies based on two sets of exchange traded funds. We find that the paper profits from academic studies of about 5% per annum are also present in our sample from 2000 to 2007. When we estimate the transactions costs on these industry momentum strategies, accounting for (a) the bid-ask spread, (b) the broker commission and (c) short selling costs. We find that, given our estimated transactions costs, the paper profits from industry momentum strategies disappear in real-life.

Keywords: Keywords: Alpha, Exchange traded funds, Industry momentum strategies, Transactions costs

JEL Classifications: C53, G11, G12

Working Paper Series