Momentum Investing in Canada: Following the Crowd to Market Gains

The Power of Following the Crowd in Canadian Momentum Investing

Following popular trends can be an effective way to discover excellent restaurants, music, and other rewarding experiences. While not a flawless approach, popularity often serves as a convenient shortcut to quality. This principle also applies remarkably well to financial markets, where momentum investing has proven to be a successful long-term strategy.

How Momentum Investing Works in Canadian Markets

The core idea behind momentum investing involves purchasing stocks that have demonstrated the strongest performance over the previous six to twelve months. Investors must remain prepared to transition to emerging opportunities as market conditions evolve. Recent analysis reveals compelling evidence of this strategy's effectiveness in Canadian markets.

Two specific momentum portfolios—focusing on six-month and twelve-month performance windows—achieved average annual gains of 17.4 percent and 19.5 percent respectively over a 26-year period ending in February 2026. During this same timeframe, the broader Canadian stock market, represented by the S&P/TSX Composite Index, delivered average annual returns of just 8.1 percent.

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These return figures are derived from backtests utilizing monthly data from Bloomberg. The calculations incorporate dividend reinvestment but exclude fund fees, taxes, commissions, and other trading expenses. Both portfolios maintain equal weighting among their holdings and undergo monthly rebalancing.

Constructing Momentum Portfolios

The momentum portfolios begin with the 300 largest common stocks on the Toronto Stock Exchange, measured by market capitalization. From this universe, they select an equal-dollar amount of the ten stocks demonstrating the highest returns over either the previous six-month or twelve-month period. Monthly rebalancing essentially involves selling all positions and reconstructing the portfolios from the ground up.

While ten-stock portfolios can deliver impressive returns, they typically carry substantial risk. Investors seeking greater stability might consider portfolios containing 20, 30, or even 50 of the top prior performers. Portfolios limited to just five stocks generally underperform and exhibit heightened volatility. Detailed long-term growth rates for these various portfolio configurations are available in accompanying performance tables.

The Perils of Concentration and Historical Volatility

A stark warning emerges from examining single-stock momentum portfolios. Over the same 26-year period, the six-month version lost 99.9 percent of its value, while the twelve-month version declined by 93.4 percent. Both suffered catastrophic losses exceeding 80 percent within months during the internet bubble collapse of 2000 and continued to underperform thereafter.

Even more diversified momentum portfolios experience significant downturns periodically. Performance graphs clearly illustrate periods when ten-stock portfolios retreated substantially from previous highs.

The most severe declines for six-month and twelve-month momentum portfolios occurred in the early 2000s, with drops of 66 percent and 71 percent respectively. During this same period, the market index fared somewhat better but still declined 43 percent from its prior peak.

The 2008-2009 financial crisis presented another challenging downturn. Once again, the market index fell 43 percent from its previous high. Momentum portfolio results varied during this crisis, with six-month and twelve-month portfolios declining 40 percent and 60 percent respectively.

Risk Considerations and Recent Performance

Generally speaking, ten-stock momentum portfolios demonstrated significantly greater volatility than the market index throughout the 26-year period. They also experienced corrections (declines exceeding 10 percent from prior highs) and bear markets (declines exceeding 20 percent) almost twice as frequently as the broader market index.

In more recent months leading to February 2026, both momentum portfolios have surged dramatically. The six-month portfolio gained 137 percent, while the twelve-month portfolio soared 248 percent over the preceding year. During this same period, the market index advanced a more modest 39 percent.

While diversified momentum portfolios show strong long-term potential, their performance amid ongoing geopolitical developments, including conflicts in the Middle East, warrants careful observation. Further details regarding the specific stocks within six-month and twelve-month momentum portfolios, along with other regularly tracked investments, are available through established financial publications.