Momentum index returns

Index providers have recently introduced indexes designed to capture the returns of the momentum  factor in stock market returns. Academic research posits four factors that drive stock market returns:
 * the market factor (beta)
 * the size factor
 * the value factor
 * the momentum factor.

Momentum in academic finance is defined as the return of stocks that have outperformed in the recent past (typically one year) minus the return of stocks that have underperformed.

As the figure to the right indicates, the momentum factor provided a positive premium over the 1981 to 2011 period, with considerable volatility. These results are consistent with longer term data.

Over the 1927 - 2011 period momentum stocks were negatively correlated to the other factors.

According to an AQR white paper momentum stock returns (as reflected in AQR momentum indexes) have performance, volatility, correlation, and risk-adjusted characteristics that suggest the following rationales for investing in momentum stocks:
 * As an alternative, in whole or in part, to growth stocks for growth stock investors;
 * As an addition to a value allocation, since the addition of momentum stocks to the portfolio reduces tracking error to the market;
 * As an alternative to growth stocks in the allocations of value/growth investors, or investors in core market indexes.

Caveats regarding momentum strategies include the following:
 * A momentum index will not always track the market index, so there will be periods where momentum will lag the market;
 * Turnover costs when implementing momentum strategies will reduce returns;
 * Momentum returns, based on both rising and falling stock prices, can only be partially attained by a long-only index.

AQR momentum index returns
AQR Capital Management, an investment management firm based in Greenwich, Connecticut, has devised momentum indexes calculated and maintained by Standard & Poors. AQR indexes both U.S. and international stocks, and provides the following indexes:


 * AQR Momentum Index (Large Cap and Mid Cap U.S. Equities): The AQR Momentum index selects stocks from the 1000 largest U.S. stocks by market capitalization.
 * AQR Small Cap Momentum Index (Small Cap U.S. Equities): The AQR Small Cap Momentum Index selects stocks from 2000 stocks by market capitalization after the 1000 largest U.S. stocks.
 * AQR International Momentum Index (Non-U.S. Equities): The AQR International Momentum Index selects stocks from the top 85% of stocks by market capitalization of each of the 19 major developed markets outside the U.S.

Each index is calculated according to the following methodology.
 * All the stocks in the investment universe are ranked by the total return over the prior 12 months excluding the last one.
 * The top 33% stocks with the highest momentum rank are selected for inclusion.
 * The selected stocks are weighted by market capitalization.

The AQR indexes are reconstituted quarterly.

The following tables provides return, standard deviation and growth of capital data for the indexes. In addition, the indexes are compared to a comparable index. AQR notes that its momentum indexes are more correlated with growth indexes. The U.S. indexes are compared to Russell growth indexes. Note that, due to the lack of long term data for the suggested benchmark international index (MSCI World ex-US Growth), the international index table uses the MSCI EAFE index as a comparable index.

MSCI momentum index returns
MSCI provides a limited number of factor indexes tracking momentum designed for institutional investors. However, iShares has an etf in registration with the SEC based on a new index, the MSCI US Momentum Index, which according to the proposed prospectus will hold between 100 to 150 high momentum stocks.

S&P momentum index returns
S&P provides a momentum tilt index that tracks the S&P Composite 1500 Index. The S&P 1500 Positive Momentum Tilt Index over weighs stocks with relatively strong momentum and under weighs stocks with relatively weak momentum. The index methodology can be summarized as follows:


 * Each stock in the S&P Composite 1500 Index is ranked in order of momentum based on price performance over the 11 months ending one month before the index rebalancing date.
 * S&P forms 20 sub-portfolios of approximately equal market capitalization, grouped by momentum.
 * S&P defines a sub-portfolio allocation factor so that a sub-portfolio with relatively high momentum will have a higher allocation factor than a sub-portfolio with relatively low momentum.
 * The weight of each stock in the index is proportionate to its market capitalization and to its sub-portfolio allocation factor.

The index is rebalanced quarterly.

Russell-Axioma momentum index returns
The Russell-Axioma momentum index indexes seek to deliver exposure to stocks with high medium-term momentum. Medium-term momentum is a measure of a stock’s past performance as measured by a stock’s cumulative return over the last 250 trading days, excluding the last 20 trading days.

For US momentum indexes, Russell ranks the stocks in the Russell 1000 or Russell 2000 Index by starting with the highest medium-term momentum stock, then adding the next highest medium-term momentum stocks until the selection reaches a total capitalization of 35% of the Russell 1000 or Russell 2000 index. The large cap momentum portfolio consists of up to 200 stocks from Russell 1000 index; the small cap momentum index is made up of up to 400 stocks in the Russell 2000 Index.

A similar selection process is used for the Russell Developed ex-US Large Cap High Momentum Index. The resulting portfolio holds up to 400 stocks of the Russell Developed-ex US Large Cap index.

The Russell momentum indexes are reconstituted monthly.

The tables below provide annual return, standard deviation, and growth of capital data for the indexes. The indexes are also compared to the appropriate parent index. There are no current funds tracking the Russell indexes.

Investment options
Investors in the U.S. can invest in exchange traded funds based on the S&P 1500 Positive Momentum Tilt Index. IShares has an etf in registration with the SEC that will track the MSCI USA Momentum Index. The table below provides a summary of available offerings.

Methodology

 * AQR Index Methodology
 * MSCI Factor Index Methodology
 * Russell-Axioma Long-Only Factor construction-methodology
 * S&P 1500 Positive Momentum Tilt Index, select methodology download.

Articles

 * How the Four Stock Premiums Work, Larry Swedroe, Marketwatch, April 16, 2012. Retrieved 1 February 2013.
 * The Case for Momentum Investing, AQR white paper.