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Bridge over ocean
1 July 2000 Financial Analysts Journal Volume 56, Issue 4

Industry Momentum and Sector Mutual Funds

  1. Edward S. O'Neal

Recent academic research has ascribed the intermediate-term (3-month to 12-month) momentum present in U.S. stock returns to an industry effect. In the intermediate term, strong (weak) industry performance is followed by continued strong (weak) industry performance. The industry-specific aspect of momentum gives rise to profitable trading strategies that use industry-sector mutual funds. In this study, strategies of buying previous intermediate-term top-performing sector funds outstripped the S&P 500 Index over the 10-year period from May 1989 through April 1999 on a total-return basis. These strategies entailed greater total and systematic risk, however, than the index.

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