Momentum factors ETFs provide exposure to stocks that have performed well in the recent past, and the rush into the category follows a period of record-low volatility. When volatility is low, markets are calm and there’s a low chance of sudden trend breaches.
Hence the record interest in momentum ETFs, which normally see net monthly inflows below $100m. And following the trend has been a winning strategy this year: the iShares MSCI World Momentum Factor ETF has returned 20% year-to-date.
European financial sector outperformance is one of the trends of 2017. Consequently, the sector has seen strong interest recently: August was the sixth inflow month in a row for European financials ETFs. Moreover, the last six months have been the largest ever in terms of inflows for these funds.
The recent experience of financial sector ETFs may serve as a stark warning to those investing in momentum ETFs: even when volatility is relatively low, trends can change suddenly. After recording gains of 30% in the previous 8 months, the MSCI Europe/Banks ETF has fallen 6.5% since early August.