ETF Momentum

51 Pages Posted: 22 Oct 2019 Last revised: 19 Nov 2019

See all articles by Frank Weikai Li

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Chloe (Chunliu) Yang

Fudan University - Fanhai International School of Finance (FISF)

Date Written: October 12, 2019

Abstract

We document economically large momentum profits when sorting ETFs on returns over the past two to four years. A value-weighted, long-short strategy based on ETF momentum delivers Carhart (1997) four-factor alphas of up to 1.20% per month. Neither cross-sectional stock momentum nor co-variation with macroeconomic and liquidity risks can explain ETF momentum. Instead, the post-holding period returns are most consonant with the behavioral story of delayed overreaction. While ETF momentum survives multiple adjustments for transaction costs, it may be difficult to arbitrage as the profits are volatile and concentrated in ETFs with high idiosyncratic volatility or that hold low-analyst-coverage stocks.

Keywords: ETFs, Exchange traded funds, momentum, overreaction

JEL Classification: G11, G12, G14

Suggested Citation

Li, Frank Weikai and Teo, Melvyn and Yang, Chunliu, ETF Momentum (October 12, 2019). Available at SSRN: https://ssrn.com/abstract=3468556 or http://dx.doi.org/10.2139/ssrn.3468556

Frank Weikai Li (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

Chunliu Yang

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

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