Abnormal returns with momentum/contrarian strategies using exchange-traded funds

Abstract

Investing in portfolios of exchange-traded funds (ETFs) provides abnormal returns that exceed transactions costs, when returns are adjusted for risk using Fama and French's three-factor model. Short formation and holding periods of one day to one week provide abnormal contrarian returns, as past losers become winners and past winners become losers. Medium formation and holding periods of 4–39 weeks provide abnormal momentum returns, as past winners keep winning and past losers keep losing. Abnormal returns for portfolios of ETFs result in an asset allocation setting including all four types of ETFs, namely domestic, international, sector, and bond ETFs, with contrarian returns maximised over a one-day formation and holding period, and with momentum returns maximised over a 20-week formation and holding period.