Momentum ETF Surges as AI Optimism Drives Retail Frenzy

The Momentum ETF (MMT) has been a lightning rod for investor enthusiasm in 2024, riding the tailwinds of a historic AI boom. However, as 2025 unfolds, the fund's recent performance has soured, raising critical questions about the sustainability of its surge. This analysis examines the interplay of AI sector volatility, shifting retail investor behavior, and broader market dynamics to determine whether MMT's momentum can endure-or if it's a cautionary tale of speculative fervor.

AI Optimism and the 2024 Surge

MMT's meteoric rise in 2024 was fueled by its heavy exposure to AI-driven stocks like Nvidia (NVDA), Palantir (PLTR), and Tesla (TSLA). These companies became darlings of the market as AI adoption accelerated, with OpenRouter reporting a staggering 3,800% year-over-year surge in AI token consumption. The fund's strategy, which tilts toward high-growth tech stocks, aligned perfectly with the "Magnificent 7" narrative, attracting both institutional and retail investors.

However, this alignment has proven precarious. By 2025, the same AI stocks that propelled MMT's gains have underperformed, with NVDA down 10% and TSLA plummeting 29% year-to-date. Morningstar senior analyst Ryan Jackson noted that momentum portfolios like MMT lack exposure to defensive stocks, leaving them vulnerable during market corrections.

Market Dynamics and the 2025 Reversal

The broader market has shifted in 2025, with value and defensive stocks outperforming the tech-heavy momentum strategies that dominated 2024. This rotation reflects a recalibration of risk appetite, as investors grapple with macroeconomic uncertainties and earnings disappointments in the AI sector. For instance, C3.ai has seen its stock price drop 45% over the past year amid poor financial performance and leadership turmoil. Such developments highlight the fragility of AI-driven narratives when fundamentals falter.

Meanwhile, the ETF industry as a whole remains robust. Global ETF assets are projected to reach $25 trillion by 2030, driven by innovations in active ETFs and digital asset exposure. Yet, this growth does not guarantee MMT's survival. The fund's struggles in 2025-only two of nine large-cap momentum ETFs ranking in the top decile of their Morningstar categories-signal a broader challenge: momentum strategies must adapt to evolving market conditions or risk obsolescence.

Retail Investor Behavior and Structural Shifts

Retail investor activity has further complicated MMT's outlook. The rise of options-based income strategies and a shift away from traditional ESG investing have altered the retail landscape. Investors are increasingly prioritizing short-term gains over long-term exposure to ETFs like MMT, which relies on sustained momentum. This trend is compounded by the democratization of trading tools, enabling retail investors to hedge or speculate directly on individual stocks rather than relying on broad-market ETFs.

Moreover, the growth of robo-advisors and tax-efficient savings plans in Europe and Asia is redirecting capital toward alternative structures. These platforms often favor diversified, low-cost strategies over concentrated bets on high-growth sectors. For MMT, which thrives on retail inflows, this represents a structural threat. Institutional investors have shown some confidence in the fund-1607 Capital Partners LLC increased its stake by 84.7% in Q4 2024-but institutional support alone cannot offset declining retail demand.

Assessing Sustainability

The sustainability of MMT's surge hinges on three factors:
1. AI Sector Resilience: Can AI infrastructure demand offset near-term corrections? While token usage remains robust, earnings disappointments and leadership issues at key firms like C3.ai suggest the sector's growth is far from guaranteed.
2. Strategic Adaptability: Has MMT adjusted its portfolio to mitigate AI sector risks? The fund has not disclosed specific changes, but reducing exposure to volatile AI stocks like C3.ai could be prudent.
3. Retail Investor Preferences: Will retail investors return to momentum strategies, or will they continue favoring alternatives? The shift toward options and robo-advisors implies a long-term realignment of retail capital.

Conclusion

MMT's 2024 surge was a product of its time-a perfect storm of AI optimism and retail frenzy. Yet, 2025 has exposed the fragility of this momentum. While the broader ETF industry remains on a growth trajectory, MMT's future depends on its ability to adapt to a market that is increasingly skeptical of tech-driven hype. For now, the fund's performance serves as a reminder that even the most celebrated strategies are not immune to the forces of volatility and shifting investor sentiment.