US tech ETF momentum strategies

Abstract

Momentum strategies sustained on buying past winners and selling past losers undermined the paradigm of the financial markets, grounded on the Efficient Market Hypothesis, due to being possible to uncover profitable trading patterns by solely analysing past stock behaviour. Afterward, behavioural finance emerged, relying on cognitive bias and investor irrationality to interpret momentum. This paper tests the implementation of momentum strategies using sectorial ETFs, particularly US technological ETFs. ETFs are financial instruments that track indexes and compose a basket of diversified securities. Consequently, 20 technological ETFs traded daily from 2010-2019 (10 years) were selected and implemented a total of 36 momentum strategies with rising formation periods. The WML portfolios delivered returns non-significant from zero throughout all timeframes. Notably, the returns of the winners and losers’ portfolios unveiled similar positive results. These results are justified by the exceptional performance of the technological indexes, driven by overconfident agents and government politics to stimulate technological innovation. Hence, ETF lower exposure to idiosyncratic risk assembled with favourable market conditions resulted in losers portfolios with positive returns. Lastly, the differential between the ETFs price and the NAV are structurally corrected by AP´s, making it more complex for ETFs prices to drift away from the NAV, undermining the conditions to surface momentum.

Date of Award	7 Dec 2021
Original language	Portuguese
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Ferreira (Supervisor)