Here is the secret to MTUM’s momentum factor: “At each rebalance, a risk-adjusted price momentum is calculated (defined as the excess return over the risk-free rate divided by the annualized standard deviation of weekly returns over thepast 3-years) for each security in the parent index over the trailing 6- and 12-month time period. The 6- and 12-month risk-adjusted price momentum scores are then standardized at +/-3 standard deviations and the standardized z-scores are translated into an average momentum score. Approximately 100-150 securities with the highest momentum scores are selected for inclusion in the Underlying Index,” says iShares.
None of the above means MTUM is bereft of stocks with value tilts. For example, Dow components Johnson & Johnson (NYSE: JNJ), Boeing (NYSE: BA) and 3M (NYSE: MMM) are found among the ETF’s top-10 holdings not because they are momentum names in the way most investors perceive momentum, but because those stocks were exhibiting strong price action upon addition to the fund.
iShares MSCI USA Momentum Factor ETF
Tom Lydon’s clients own shares of Amazon, Facebook and Google.