Factor Momentum is an interesting concept – it posits that factor portfolios (value, quality, low-volatility, momentum, etc.) themselves exhibit momentum. If a certain factor worked in the past, it will continue working in the near-term. We had introduced this in Factor Momentum Everywhere and setup a couple of model portfolios – Model Momentum that uses our own factor models, and Factor Momentum that uses ETFs.
While discussing Factor MAX, we realized that there are now index funds that reference the basic factors that can be used instead of ETFs. ETF liquidity tends to be patchy and does not support large portfolios. Index funds are more convenient in that sense.
Here’s how factor momentum using just these basic factor indices looks like:
Like every investment/trading strategy, there will obviously be years where it under-performs.
However, it looks like this has held its own.