Given elevated headline risk of both the domestic and foreign varieties, it would be reasonable for investors to surmise that the momentum factor is faltering.
It’s a fair perspective when accounting for all the talk about the “SaaSpocalypse” and retail investors’ long-running conflation of the growth and momentum styles. Said another way, market participants have often thought of momentum investing being dependent on growth stocks, but that’s not the reality and there is some good news in the separation of the two.
Notably, the iShares MSCI USA Momentum Factor ETF (MTUM), one of the largest exchange traded funds dedicated to the momentum factor, has pieced together a year-to-date even with a nearly 40% weight to technology stocks.
MTUM, which turns 13 years old next month and has $21.2 billion in assets under management, follows the MSCI USA Momentum SR Variant Index. Despite the aforementioned lofty weight to tech stocks, the index is a sector-agnostic basket as its primary focus is large- and mid-cap stocks displaying appreciating price momentum.
Understanding MTUM’s Methodology
Morningstar boosted its medalist rating on the iShare ETF to silver from bronze, confirming it’s a good time to examine exactly how this fund functions. As advisors know, evaluating ETFs’ “plumbing” is always essential and that’s especially true with factor-based strategies such as MTUM.
The ETF’s underlying index “ranks stocks by averaging their seven‑ and 13‑month returns, each adjusted for three‑year volatility to emphasize stable momentum and reduce exposure to cyclical names,” notes Morningstar analyst River Meng.
From there, the stocks with the best risk-adjusted momentum scores are selected and are then weighted by their market values and momentum scores. So it’s not surprising that this ETF features some magnificent seven names among its top 10 components, but what may surprise investors is the inclusion of “sleepier” fare such as Johnson & Johnson (NYSE: JNJ) and Walmart (NASDAQ: WMT). In fact, half of MTUM’s top 10 holdings are members of the Dow Jones Industrial Average, but it’s not a guarantee that be true every quarter.
“The index rebalances quarterly, rotating up to 30% of the portfolio or until all holdings show stronger momentum than remaining candidates,” adds Meng. “During periods of extreme market volatility, it can conduct a special rebalance using only the seven‑month risk-adjusted momentum, allowing it to adapt faster to changing conditions.”
More MTUM ‘Secrets’
Clients and investors don’t need to get bogged down in the nitty gritty of an ETF’s day-to-day operations, but there are some related clues that may be instructive to advisors considering MTUM.
“BlackRock, iShares’ parent, has the technology and people to track this ETF’s index closely,” concludes Meng. “It automates what it can and allows experienced managers to step in to handle index changes, rebalances, corporate actions, and trade approvals. The firm’s global trading desk provides cost‑efficient local execution, and an independent risk committee monitors tracking to keep results within set limits.”
MTUM’s annual fee is 0.15%, or $15 on a $10,000 investment, which is fair for factor-based strategies outside the growth and value spaces.
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