Factor investing focuses on identifying stocks with certain characteristics, or factors, such as value, quality, momentum, size, and minimum volatility that have historically been linked to higher returns.

However, factor returns have generally proven to be highly cyclical, and timing the market is never easy. One year, low volatility might be in favor, while the next year, momentum could dominate.

Over the past 10 and 15 years, only two factor indexes—quality and momentum—have outpaced the broader market.

This year, the momentum factor is a standout performer as investors continue to pour money into the hottest stocks. The Invesco S&P 500 Momentum ETF (SPMO Quick QuoteSPMO - Free Report) has skyrocketed almost 50%, while the iShares MSCI USA Momentum Factor ETF (MTUM Quick QuoteMTUM - Free Report) has gained 40%.

The momentum effect, which refers to the tendency of winning stocks to outperform losing stocks, has been documented in many academic studies, including the seminal paper by Jegadeesh and Titman (1993).

Last year, the MTUM ETF underperformed the broader market, as it added the highflier NVIDIA (NVDA Quick QuoteNVDA - Free Report) only during its May rebalancing, missing the stock’s meteoric rise earlier in the year. Additionally, the ETF was tilted toward the underperforming healthcare sector.

The SPMO ETF is top-heavy, with its top five holdings—Amazon (AMZN Quick QuoteAMZN - Free Report) , NVIDIA, Meta Platforms (META Quick QuoteMETA - Free Report) , Berkshire Hathaway (BRK.B Quick QuoteBRK.B - Free Report) , and Eli Lilly (LLY Quick QuoteLLY - Free Report) —comprising 37% of the portfolio. Since its inception in October 2015, the product has surged over 331%, significantly outperforming the S&P 500’s (SPY Quick QuoteSPY - Free Report) 250% gain and MTUM’s 235% rise during the same period.

To learn more, please watch short video above.