Momentum: The Other Second Wave

Momentum: The Other Second Wave

Will the risk-on rally continue?

Reviewed by: Ben Lavine
Edited by: Ben Lavine

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Benjamin Lavine, chief investment officer for 3D Asset Management.


With small cap value having made a sharp comeback from the depths of the mid-March COVID-19 pandemic bear market, and Robinhood traders driving up both stay-at-home stocks and beaten-down consumer cyclicals (e.g., airlines), the “momentum” style of investing experienced a deep drawdown in early June that has partially reversed itself as of the time of this writing.

With the threat of a second wave of COVID-19 active cases projected over the second half of this year, and the Federal Reserve casting a pessimistic economic outlook following this week’s meeting, we could be setting ourselves up for a second wave of “momentum” outperformance alongside “low volatility.”

As we observed in our “Factor ETFs For Diversification Or ‘Diworsification?’ and “The Year Smart Beta Died?” articles published last year on, this has been one of the more challenging periods for factor-based (aka smart beta) investing, except for “growth,” which continues to beat the pants off other factors, despite its long-term subpar performance (see below) and 2020 continues that trend so far.

Figure 1 displays the Bloomberg US Pure Factor performance year to date through June 10, 2020.  Note: Bloomberg US Pure Factors represent theoretical noninvestable long/short baskets designed to capture the specified factors. A net positive return implies the factor is outperforming and vice versa.



Figure 1: US Growth Factor Performs Consistently So Far This Year While All Other Factors Have Experienced Reversals Post COVID-19


“Momentum” had been performing moderately well alongside “profitability” throughout the March market sell-off as investors sought the high ground of certain profitability and positive sentiment that would likely survive a post-COVID-19 world order. These factors then continued to perform reasonably well throughout the market recovery in April and May.

Then in June, we witnessed a sudden reversal of both factors as investors chased out-of-favor COVID-19 victim stocks across consumer and industrial cyclicals in anticipation of a sharp economic recovery from pandemic self-quarantines.

“Momentum” performed worse than “profitability,” as the former tends to be more volatile versus the latter, as the “losers” have run well ahead of the “winners,” likely a result of short covering. “Low volatility” had also fallen out of favor, with the renewed risk-on sentiment, and has performed even worse than “value” so far this year.

Indeed, it appeared as if the shine had started to come off this favored style of investing commonly employed by both institutional hedge fund and retail investors alike, even with FAANMG popularity and the Nasdaq-100 reaching new highs.

As is indicative from Figure 1, the “growth” style of investing remains preeminent over all other factors, and has actually turned positive over the long run, especially when juxtaposed against a significant five-year drawdown in “value” (see Figure 2).



Figure 2: US Growth Factor Turns Positive Over The Long Run Juxtaposed With A Significant Drawdown In Value


There were multiple signs that “momentum” appeared to have been overbought and overcrowded, as “value,” “dividend yield” and “low volatility” had fallen out of favor. Figure 3 displays a chart from MSCI measuring factor crowdedness as indicated by factor valuation spreads, short interest spreads, correlations and other technical measures.

Even with the June sell-off, “momentum” shows up as significantly crowded, driven by historically wide valuation and short interest spreads. On the other side, MSCI shows “value,” “yield” and “beta” (an inverse of low volatility) as out of favor.


Figure 3: Momentum Appears Overcrowded With Value & High Beta Out Of Favor

Source: MSCI


Again, this could largely be a function of the left tail of the distribution overwhelming the right tail, as long-only baskets tend to exhibit more muted crowdedness metrics versus long/short baskets. However, MSCI seems to make a strong case that momentum is still over-owned, even with June’s sharp reversal. But will we see the crowd abandon momentum altogether?

This setup looks similar to what we observed last September, when momentum experienced a sharp reversal following reports that short-term lending markets (i.e., REPOs) broke down, compelling the Fed to step in and provide liquidity backstops. Momentum went on to recover and finish strongly for the year.

Rush Back Into Safety?

We could be facing a similar situation today following the Fed’s downbeat economic forecast and forward guidance that doesn’t anticipate an interest rate increase until 2023. With the threat of a second wave of the COVID-19 outbreak, the rush to add on cyclical risk throughout the second quarter may see a rush back into styles favoring greater certainty and lower volatility.

Based on the current basket (Figure 4), the iShares Edge U.S.A. Momentum Factor ETF (MTUM), is exhibiting more defensive characteristics (e.g., lower leverage, higher profitability and particularly lower volatility) versus how it was positioned at the beginning of the year. Based on its negative exposure to “volatility,” MTUM is the most defensively positioned since early 2017.



Figure 4: Momentum (MTUM) Set Up For Defensive Positioning



When we look at a low volatility proxy such as the Invesco S&P 500 Low Volatility ETF (SPLV) (Figure 5), the current basket is exhibiting historically low exposure to “volatility” versus recent history while exhibiting modest positive exposure to “value,” its highest level versus recent history.



Figure 5: Low Volatility (SPLV) Most Defensively Positioned Relative To Its Own History



So, heading into the second half, we could see “momentum” and “low volatility” representing this cycle’s “growth” and “value” investment style boxes, respectively, for U.S. equity investors. Whether we’ll see a reversal in other factor crowd favorites such as “high growth” and “high profitability” remains to be seen, but the June risk-on rally may have seen its better days until we are able to finally move past the COVID-19 pandemic.


At the time of this writing, 3D held positions in MTUM and SPLV. The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions of others are assumed to be true and accurate however 3D Asset Management does not warrant the accuracy of any of these. There is also no assurance that any of the above are all inclusive or complete.

3D does not approve or otherwise endorse the information contained in links to third-party sources. 3D is not affiliated with the providers of third-party information and is not responsible for the accuracy of the information contained therein.

Past performance is no guarantee of future results. None of the services offered by 3D Asset Management are insured by the FDIC and the reader is reminded that all investments contain risk. The opinions offered above are as of June 11, 2020 and are subject to change as influencing factors change.

More detail regarding 3D Asset Management, its products, services, personnel, fees and investment methodologies are available in the firm’s Form ADV Part 2 which is available upon request by calling (860) 291-1998, option 2 or emailing [email protected] or visiting 3D’s website at


Ben Lavine is CIO of 3D Asset Management, based in East Hartford, Connecticut.