Yes — trend following has a century of documented evidence, and ETFs make it accessible to everyday investors. But “works” doesn’t mean “always wins.” It delivers strong returns in trending markets and during crises, while losing small, repeated amounts in choppy, sideways markets.
The short version
- Trend following has worked across 135+ years of data and many asset classes.
- Its biggest documented edge: crisis alpha — it tends to profit (or at least protect) when stocks crash.
- The cost: whipsaw losses and long flat stretches that test your patience.
- ETFs like DBMF, KMLM, and CTA give you trend exposure without building your own system.
What does the evidence actually say?
Trend following is one of the most studied strategies in finance. Two papers matter most:
- “Time Series Momentum” (Moskowitz, Ooi & Pedersen, 2012): a simple 12-month momentum signal produced consistent positive returns across 58 liquid instruments — equities, bonds, currencies, and commodities. The effect was strongest for long horizons and has persisted out-of-sample.
- “A Century of Evidence on Trend-Following Investing” (Hurst, Ooi & Pedersen, AQR, 2017): extending the analysis back to 1880, trend following earned positive returns and — critically — performed best during the worst equity drawdowns, earning the “crisis alpha” label.
The mechanism is behavioral and structural: investors underreact to news, then overreact, creating trends that persist. Herding, slow information diffusion, and forced selling all push prices in one direction long enough for a trend system to capture.
How this translates to ETFs
The academic studies used futures, but the same logic applies to ETFs with a single rule. The classic example is the 200-day moving average on the S&P 500:
- Above the 200-day average → hold the ETF.
- Below it → move to cash (or a bond ETF).
Over the long run, this simple filter has historically avoided the deepest parts of bear markets. The trade-off: it gives back gains when the market chops sideways around the average, triggering several small losses in a row.
If you’d rather not manage the signal yourself, managed-futures and trend ETFs package the strategy for you. Examples include the iMGP DBi Managed Futures Strategy ETF (DBMF), the KFA Mount Lucas Index Strategy ETF (KMLM), and the Simplify Managed Futures Strategy ETF (CTA).
Where it works — and where it struggles
| Market regime | Trend following result |
|---|---|
| Strong uptrend | ✅ Captures most of the move |
| Sustained downtrend | ✅ Steps aside (long-only) or profits (short) |
| Crash / crisis | ✅ Crisis alpha — the strongest edge |
| Choppy, sideways | ❌ Whipsaw — repeated small losses |
The real catch (read this before you start)
Three things break most people before the strategy can work:
- Whipsaw is psychologically brutal. Losing six small trades in a row feels like failure even when the system is doing exactly what it should.
- It lags in bull markets. In a relentless melt-up, a trend filter that moved you to cash on a dip can badly underperform buy-and-hold — and underperformance makes people quit.
- Costs and taxes compound. Higher turnover means more spreads and, in taxable accounts, more realized gains.
The honest takeaway: trend following works, but it’s a risk-management discipline more than a get-rich shortcut. If you can’t stomach underperforming the crowd for years at a time, it isn’t for you — and that’s fine.
Quick self-check
What’s the single most important factor in whether trend following works?
The market regime: it shines in trending markets and suffers in choppy, sideways ones. Knowing which regime you’re in matters more than any indicator setting.
Why do most people fail at trend following even though it works?
Discipline — the losing streaks in chop cause people to abandon the system right before the next big trend.
Which ETF would a long-only trend trader most likely hold when the market is below its 200-day average?
Cash or a bond ETF — the rule says step aside when the uptrend breaks.
FAQ
Has trend following ever stopped working?
Trend following goes through long flat or losing periods — sometimes years — especially in choppy markets. It has never permanently ‘broken,’ but the patience required to endure its drawdowns is exactly why many investors abandon it before it pays off.
Do I need to short the market to trend trade ETFs?
No. Most retail investors run a long-only version: stay invested in ETFs while the trend is up, and move to cash or bonds when it turns down. Shorting adds complexity and unlimited risk and is optional.
Is trend following better than buy and hold?
It depends on your goal. Trend following historically reduces the deepest drawdowns and provides ‘crisis alpha,’ but in a relentless bull market it can lag a simple buy-and-hold. Many investors use it for risk control, not to maximize raw returns.
What’s the difference between time series and cross-sectional momentum?
Time series momentum compares an asset to its own past (e.g. price above its 200-day average). Cross-sectional momentum ranks assets against each other and buys the strongest. Trend following usually refers to time series momentum.
Disclaimer: Educational content only — not financial advice. Past performance does not guarantee future results. Trading involves risk of loss. Full disclaimer · Affiliate disclosure.