The momentum effect is a classic anomaly documented many times in many different markets. Therefore it is no surprise several studies are showing that momentum also appears within the REITs universe and REITs with the highest past performance beat lower-performing trusts.
We add this effect to our database; however, we advise caution as one recent academic study (see Huerta, Rivas for details) documents that momentum is starting to lose its statistical and economic significance.
* For those interested in systematic quantitative momentum factor ETF implementation, here is a link to the Alpha Architect Quantitative Momentum ETF (strategy background), our partner. *
Momentum persistence is usually explained by behavioral biases like investor herding, investor over and underreaction, and confirmation bias. For example, if a firm/trust releases good news and the stock price only reacts partially to the good news (under-reaction bias), then buying the stock/trust after the initial release of the news will generate profits.
per annum, data for long only strategy with a 3 month holding period, data from table 1
not stated
calculated as a one third of estimated average number of REITs in US market (data from studies in “Other papers” section)
not stated
The investment universe consists of all US REITs listed on markets. Every month, the investor ranks all available REITs by their past 11-month return one-month lagged and groups them into equally weighted tercile portfolios. He/she then goes long on the best performing tercile for three months. One-third of the portfolio is rebalanced this way monthly, and REITs are equally weighted.
This is not the only way to capture the momentum factor in REITs as a consequential portfolio could be formed as a long/short or from quartiles/quintiles/deciles instead of terciles or based on different formation and holding periods (additional types of this strategy are stated in the “Other papers” section).
No - The selected strategy is long-only, and as such, has a strong exposition to equity market risk; therefore, it can’t be used as a hedge/diversification during the time of market crisis.
