How It Works

Following Global Asset Trends

We have heard other people say that markets are efficient and that everyone should “index” their money. That is, everyone should buy a few index funds that cover US and Foreign Stocks and maybe some bond indexes and simply buy and hold. At ETFMI, we politely disagree. We like indexing – don’t get us wrong – and we believe that markets are efficient over extended periods, but we know that they are not necessarily “efficient” in the short term.

As we all are aware, sometimes the irrational and misguided behaviors of humans create prices in the market that are too high or too low. Markets are efficient, but only until irrational humans start interacting with them. We specialized in identifying these periods in the market when human behavior starts to create mispricings.

Our systematic rotation process uses global indexes to exploit “Momentum”, a timeless market inefficiency. We consider the “Momentum Inefficiency” to be timeless because it results from predictable emotional human behavior and human nature never really changes.

As far as exploitable market inefficiencies go, there are just two that have stood the test of time, Value and Momentum.

We prefer Momentum over Value and Indexing.  Historically, our type of intermediate-term momentum investing: rotating from one global index to another in search of the best bull markets, has delivered better performance than either, with smaller portfolio losses in bad years for the last 8.5 years (according to our backtests)


Warren Buffett is perhaps the most famous investor that systematically exploits market inefficiencies. His stellar long-term performance is good evidence that “Value Investing” outperforms “Index Investing” when done correctly. Berkshire isn’t the only value investment manager that has had exceptional performance, over the long term many others do. Understanding what Warren Buffet and other “Value” investors do, and why their process works, is probably the easiest way to start the conversation about Momentum Investing. This is because “Value Investing” exploits a market inefficiency created by humans interacting with the market in a predictable way (just like Momentum).

As you probably are aware, Value investment opportunities are typically created when the public hates an investment and starts over selling it. Sometimes the selling is warranted and sometimes it is overdone. When this happens, Value investors use a calculation known as Discounted Cash Flow Analysis to determine if the current price represents the actual value of the company or not. If the current price is too low, then they buy the undervalued company.

However, the challenge to this strategy is that very few investors feel comfortable going against consensus and buying investments that everyone else hates. Alone in a losing trade is a difficult place to be as a Wall Street money manager that needs to answer to clients.

Buying the Value investment is the easy part, it’s waiting for the market to come around to your conclusion that tests human discipline. Even if the “Value” shares you purchased go dramatically lower, and stay lower for years, as a Value investor you must remain steadfast in your conviction, waiting for as long as it takes for the prices to come back to fair value.

This is a challenging thing to do. As humans, we can go against the crowd for a while, but to do it for years as we are losing money and everyone is telling us we are wrong is almost impossible. Unless you are Buffett, it is hard to be trusted enough and liquid enough to stick to your convictions long enough to be eventually proven right. Unnatural, and difficult. That’s why there is money to be made as a Value investor – few people can do it.

Two non-natural actions are required of successful value investors:

1. Going against market consensus to purchase a stock everyone hates.
2. Not giving in to peer pressure even if it takes years to be proven right.

Similarly, successful “Momentum Investing” exploits another human created inefficiency in the market and requires a series of non-natural actions to make profitable.

As Momentum Investors, we focus on stocks or asset classes that are making new all-time highs, and we buy them. That shouldn’t be surprising, and it’s not hard to do. Lots of people buy hot stocks and lever themselves into bull markets. And this group of investors are typically less risk adverse than average. These speculators usually have preemptively steadied themselves mentally against coming volatility or possible losses. These investors are risk takers. Usually they are making a bet and are willing to hold it for a while to see how it turns out for better or worse.

Not us.


We approach the market differently. We buy all asset classes that are showing Momentum characteristics, and then we watch them extremely closely. If the price starts to fall and triggers our model, we sell.

Right away.

Even if we just bought the investment and even if we have a loss. We don’t mind taking small losses. In our process, there is no “holding and hoping”, no waiting for the next announcement, no trying to “get back to even”. We are a fully quantitative manager, which means math, not emotion tells us when and what to buy and sell.

Like value, there are also two non-natural actions that are required to successfully exploit Momentum.

Here they are:

1. Buy at new all-time highs, but be willing to immediately sell and take a small loss.
2. Hold on to winning investments until they stop winning, even if you think they are over-priced.

That’s what we expect. Small losses and large gains – that’s the recipe for successful Momentum investing. The small losses are offset by large gains. For the math to work and Momentum investing to be profitable, you need to ignore the voice in your head that might otherwise make you sell too soon. This is also an unnatural discipline. After many small losses, the human in all of us is a little too eager to ring the register and bank a nice gain.

We like to think of ourselves like a Las Vegas casino. A casino might lose money on a given hand or on a given night, but the casino never changes the rules, because they know that the rules are in their favor. And we know that the rules we use will deliver the results that we are seeking.

There have been many papers written on Momentum investing that show Momentum as an exploitable anomaly, some analyzing data going back over 200 years (you can see them on our website under the White Papers tab). Many of these strategies, until now, were thought to be too expensive to implement in the real world. That is now changing due to a new investment vehicle in the marketplace: Exchange Traded Funds (ETFs). ETFs allow investors to gain sector level exposure at a very low cost and we have developed multiple effective ways to exploit global Momentum anomalies using these vehicles.

Our process of following bull markets around the world might sound risky, but we maintain that it is nowhere near as risky as Index investing or Value investing when measured by “draw-down” or “standard deviation”.

We developed our strategies in the years before, during and after the financial crisis of 2008. These and other similar strategies saved regular investors then, and we are using them to help even more investors now. Once you learn the rules, it is easy to successfully follow trends using ETFs. Let our expertise guide you in implementing a rules-based investment program that can deliver consistent returns and avoid large draw-downs. Our mission is to deliver portfolios that outperform Indexing while taking on less risk.

Don’t let anyone tell you that you can’t do better than the index.