Growth/Value, Market Cap, and Momentum

Abstract

This article examines the profitability of style momentum strategies on portfolios based on firm growth/value characteristics and market capitalization. The authors use monthly total returns of nine S&P style indexes to avoid concerns about firm size, liquidity, credit risk, short-sale constraints, and transaction costs. They find that, historically, buying a past best-performing style index and short-selling a past worst-performing style index generates an economically and statistically significant profit of 0.8% a month over the June 1995 to March 2009 period. This profitability remains economically plausible after adjusting for systematic risk, short-sale costs, and transaction costs. Thus, investors may seek outperformance by implementing style momentum strategies on exchange-traded funds linked to S&P style indexes.