Momentum Factor Posts Record-Breaking 23% YTD Outperformance
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
momentum-investingfactor-investing
Fazen Markets Editorial Desk
Collective editorial team · methodology
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A momentum-focused investment strategy has generated a record-breaking 23 percentage points of outperformance against its value counterpart year-to-date through late May 2026, based on analysis of major factor indices. This historic divergence, sourced from market data, highlights a market overwhelmingly favoring recent winners, predominantly mega-cap technology and artificial intelligence stocks. The concentrated rally places immense strain on traditional multi-factor portfolios designed for diversification and raises questions about the strategy's sustainability.
Momentum investing, the strategy of buying assets with strong recent performance, has historically experienced cyclical periods of dominance. The current surge, however, eclipses previous records, including a 15-percentage-point outperformance streak observed in early 2021 during the peak of the speculative tech rally. The current macro backdrop of moderating but persistent inflation and elevated interest rates has created a challenging environment for value stocks, which typically thrive in a strong economic expansion.
The catalyst for this extreme move is the market's intense concentration on a handful of AI-related winners. As concrete revenue growth from generative AI begins to materialize in earnings reports, investors have piled into the same cohort of large-cap technology firms. This creates a self-reinforcing cycle where price appreciation begets further inflows into momentum-focused funds, accelerating the trend. The lack of broad market participation has left value-oriented sectors like energy and financials trailing significantly.
The iShares MSCI USA Momentum Factor ETF (MTUM) has surged 34% year-to-date, dramatically outpacing the iShares MSCI USA Value Factor ETF (VLUE), which has gained just 11% over the same period. This 23-percentage-point gap is the widest on record for a comparable period. For context, the S&P 500 index has returned 18% YTD, meaning the momentum factor is nearly doubling the broader market's performance.
Factor Performance (YTD through May 26, 2026)
| Factor | ETF Ticker | YTD Return |
|---|---|---|
| Momentum | MTUM | +34% |
| Value | VLUE | +11% |
| Broad Market | SPY | +18% |
The top holdings of MTUM, including Nvidia (NVDA), Microsoft (MSFT), and Amazon (AMZN), have seen average returns exceeding 40% this year. These three stocks alone account for over 30% of the ETF's portfolio weight. The concentration risk is stark when compared to the equal-weight S&P 500, which has underperformed the cap-weighted index by over 8 percentage points in 2026.
The momentum rally has created clear winners and losers across sectors. Technology (XLK) and Communication Services (XLC) are the primary beneficiaries, with the latter gaining 32% YTD driven by heavyweights like Meta Platforms (META). Conversely, the energy sector (XLE) is down 2% year-to-date, and the financial sector (XLF) has risen a modest 7%, underperforming the broader market. This indicates a highly selective risk-on appetite focused exclusively on AI-enabled growth narratives.
The primary risk to the momentum trade is its extreme concentration. A reversal in the fortunes of one or two key mega-cap stocks could trigger a rapid unwinding of momentum positions. Quantitative funds that employ risk-parity or multi-factor strategies are facing significant headwinds, as the historic underperformance of value is dragging down their composite returns. Institutional flow data shows continued capital rotation into momentum-focused products, but options markets indicate rising demand for protection against a sharp pullback in tech names.
The sustainability of the momentum trade hinges on two immediate catalysts. Second-quarter earnings reports, beginning in mid-July, must validate the lofty growth expectations priced into AI-centric stocks. Any sign of disappointment from leaders like Nvidia could break the momentum cycle. The Federal Open Market Committee meeting on June 18 will also be critical; a more hawkish-than-expected tone on interest rates could disproportionately punish long-duration growth stocks.
Technical levels for the MTUM ETF are crucial. A break below its 50-day moving average, which it has held firmly above since November 2025, would signal a potential trend breakdown. For the value factor, investors are watching the VLUE ETF for a decisive break above the 125 level, which has acted as resistance for the past three months. A close above this level could indicate the beginning of a long-awaited factor rotation.
Momentum investing is a quantitative strategy that involves buying securities that have performed well over a recent period, typically three to twelve months, and selling those that have performed poorly. The strategy is based on the academic observation that asset prices often exhibit persistence in their trends. Unlike value investing, which seeks undervalued assets, momentum is agnostic to valuation and purely focused on price trends and market psychology.
While the current concentration in tech stocks draws comparisons, the underlying fundamentals differ. During the dot-com bubble, many leading companies had minimal revenue and no profits. Today's momentum leaders are profitable giants with massive cash flows. However, the valuation dispersion between the top-performing momentum stocks and the rest of the market is approaching dot-com era extremes, which is a key concern for analysts monitoring bubble risks.
Yes, inverse and leveraged ETFs allow investors to take a position against the momentum factor. The ProShares Short Russell 1000 Momentum Factor ETF (SMMT) seeks daily investment results that correspond to the inverse of the Russell 1000 Momentum Index. These products are typically used for short-term hedging or tactical bets by sophisticated investors, as they carry high risks due to daily rebalancing and compounding effects.
Record momentum outperformance is fueled by concentrated AI bets, creating severe strain on diversified portfolios.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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