Can Exchange Traded Funds be Used to Exploit Country and Industry Momentum?

Financial Markets and Portfolio Management, Forthcoming

33 Pages Posted: 24 Jun 2008 Last revised: 7 Oct 2012

Laura Andreu

University of Zaragoza - Faculty of Business and Economics

Laurentius (Laurens) Adrianus Petrus Swinkels

Erasmus University Rotterdam (EUR); Robeco Institutional Asset Management

Liam Tjong-A-Tjoe

Erasmus University Rotterdam (EUR)

Date Written: August 2012

Abstract

There is overwhelming empirical evidence on the existence of country and industry momentum effects. This line of research suggests that investors who buy countries and industries with relatively high past returns and sell countries and industries with relatively low past returns will earn positive risk-adjusted returns. These studies focus on country and industry indexes that cannot be traded directly by investors. This warrants the question whether country and industry momentum effects can really be exploited by investors or are illusionary in nature because they exist only on non-tradable assets. We analyze the profitability of country and industry momentum strategies using actual price data on Exchange Traded Funds (ETFs). We find that, over the sample periods that these ETFs were traded, an investor would have been able to exploit country and industry momentum strategies with an excess return of about 5% per annum. These returns cannot be explained by unconditional exposures to the Fama-French factors. The daily average bid-ask spreads on ETFs are substantially below the implied break-even transaction costs levels. Hence, we conclude that investors that are not willing or able to trade individual stocks may use ETFs to benefit from momentum effects in country and industry portfolios.

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

JEL Classification: C53, G11, G12

Suggested Citation

Andreu, Laura and Swinkels, Laurentius (Laurens) Adrianus Petrus and Tjong-A-Tjoe, Liam, Can Exchange Traded Funds be Used to Exploit Country and Industry Momentum? (August 2012). Financial Markets and Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1150972 or http://dx.doi.org/10.2139/ssrn.1150972

Laura Andreu

University of Zaragoza - Faculty of Business and Economics ( email )

Gran Via, 2
50005 Zaragoza, Zaragoza 50005
Spain

Laurentius (Laurens) Adrianus Petrus Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Institutional Asset Management ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Liam Tjong-A-Tjoe

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Paper statistics

Downloads
794
Rank
23,401
Abstract Views
2,758