Momentum strategy is not trend trading. Momentum trading refers to taking advantage of the relative performance of one sector against another, while trend trading refers to identifying the technical indication of a market direction. Applied to international ETFs, momentum strategies focus on currency fluctuations, geopolitical events and economic strengths and weaknesses across countries and industrial sectors.
When the Japanese yen is weak to the U.S. dollar, more Japanese cars will be sold in the United States because their prices would be inexpensive relative to American cars. This would be a good momentum indicator for Japanese car companies and their suppliers. A weak yen would also favor Japanese electronics and other goods imported into the huge U.S. market. International ETF portfolio managers would sell dollar assets, buy yen assets, and then wait for the yen to grow in strength against the dollar. Chances are that their profits would result more from the currency play than from Japanese corporate earnings, but both would be factors in the success of the strategy.
An insightful definition of momentum appeared in an award-winning research paper by momentum strategy expert, Gary Antonacci, presented to the National Association of Active Investment Managers: "Momentum is the tendency of investments to exhibit persistence in their price performance." Some traders liken it to a relative strength index across sectors. Applied to International ETF portfolio management, momentum strategy recognizes the ebb and flow of trade dominance between regions and countries, globally. Much of this is based on the relative strength of individual currencies against each other and the effect of certain commodity prices.
Oil is a major influence on global trade. When transportation becomes more expensive because of fuel costs, the consumer price of imported goods rises. As oil prices rise, sales of SUVs and trucks decline in favor of hybrid and electric vehicles. This benefits suppliers of hybrid and electric vehicle technology as well as natural gas and biofuel producers. As consumer dollars shift from gas guzzlers to high-mileage vehicles, the industries that produce parts for high-performance engines consolidate and decline just as the typewriter industry declined with the advent of the personal computer. A momentum trader anticipating a rise in the price of oil would sell certain automobile stocks, airline stocks and other sectors dependent on inexpensive energy.
Investment performance is not necessarily dependent on corporate earnings if a single currency outperforms other currencies. A country in recession may produce modest corporate earnings, but if its currency grows in strength because of geopolitical crisis, investments in ETFs for that sector will show strong profits. Inefficiencies in sectors give rise to momentum, so international ETF strategies seek out inefficiencies on which to capitalize.
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