Points referred by @Mudit.Kushalvardhan, hold true, Momentum ETFs typically include a broad range of stocks in their respective indexes, which may dilute their potential returns compared to a more concentrated portfolio. Studies and practical experiences suggest that selecting the top-performing stocks within an index can lead to superior returns. For instance, focusing on the top 10 or 20 stocks based on momentum criteria can often yield better results than a broader ETF which holds many more stocks.(https://www.etf.com/sections/news/single-factor-focus-ranking-top-momentum-etfs).
Furthermore, the frequency of rebalancing is crucial in momentum strategies. More frequent rebalancing, such as weekly, tends to capture the momentum effect more effectively than monthly or quarterly rebalancing. This is because momentum trends can shift quickly, and frequent rebalancing allows the portfolio to adjust and capitalize on these shifts in a timely manner. ETFs, due to their structure and operational constraints, often do not rebalance as frequently, which can limit their performance relative to a more actively managed or frequently rebalanced strategy.
Therefore, while momentum ETFs can be a convenient way to gain exposure to momentum investing, they may not fully capture the potential returns that a more focused and frequently rebalanced strategy can offer.
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