Momentum in Exchange Traded Funds: A practical study of the momentum effect in Exchange Traded Funds

Kristoffer Dencker & Jens Helvig Eriksen

Student thesis: Master thesis


This thesis investigates the cross-sectional momentum effect in exchange traded funds. Crosssectional momentum is the tendency of assets to exhibit persistence in their relative performance, which was initially found in stocks by Jegadeesh & Titman back in 1993. They show that a zero-cost long/short strategy that buys recent winners and sells recent losers (Winners-Minus-Losers), generate abnormal returns. This thesis strongly indicates that exchange traded funds cannot be used to exploit crosssectional momentum. We show that Jegadeesh & Titman’s zero-cost momentum strategy that buys recent winners and sells recent losers, are not profitable on exchange traded funds. This strongly indicates that there is no momentum effect in exchange traded funds, atleast not with the inclusion of fixed income ETFs. Thus, we cannot reject that a momentum effect might be present in stock-based ETFs, only. Though our results strongly indicate that this is not the case. In addition, we examined whether momentum was driven by certain time periods. We find no evidence for this, though the introduction of K evaluation periods was successful in reducing the effect from transaction costs. Meanwhile, our results show great potential for long-only momentum-strategies that buys recent winners or losers. We also investigated whether the momentum seemed to be driven by certain risk factors. But due to the inclusion of fixed income ETFs, we fail to answer this question. This being due to the risk models we applied as momentum indicators, could not account for the risk in fixed income and therefore they tended to favor fixed income ETFs. This led to biased results, which are not sufficient to reject or confirm that momentum in ETFs could be driven by specific risk factors. The reason why exchange traded funds does not exhibit momentum might stem from the fact that these funds are much broader-based than single securities, and therefore contain less idiosyncratic risk. At the same time, ETFs fluctuate less in price and do not deviate significantly from intrinsic value, as the market makers is intervening through the process of either issuing new certificates or repurchasing existing ones in the market, to meet demand and prevent arbitrage.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages98