ETF Trends
ETF Trends

Low volatility, quality and value are among the investment factors that are being widely embraced this year, but that does not mean investors should forget about momentum and the iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM).

MTUM tracks large- and mid-cap U.S. stocks with relatively high price momentum. The underlying MSCI USA Momentum Index calculates the ratio of each stock’s price returns over the trailing 13 and seven months against volatility over the past three years. Companies are then weighted by their risk-adjusted momentum.

Since momentum strategies can overweight riskier stocks, the ETF could could underperform during another correction. Since defensive stocks typically do better during volatile conditions, the momentum strategy could load up on conservative picks and miss out on the initial recovery in riskier assets.

“The momentum factor theory is somewhat opposite of the value investing, which focuses on companies with low valuations, which have recently underperformed the market due to various economic, consumer or company specific factors,” according to a Seeking Alpha analysis of MTUM. “While the theory has been around for over 20 years, the investing strategy has not received a wide popularity amongst investors. Furthermore, few of the active mutual funds and ETFs that supported have not achieved consistent results.”

However, MTUM is among the many momentum ETFs that prove momentum can mean much more than just a high beta from a sexy sector. Momentum can also mean an emphasis on relative strength and strong price characteristics.

Smart beta ETFs have seen $45 billion in net inflows globally year-to-date and are on course for a record year, compared to the $30 billion added for all of 2015, writes Andrew Ang, Head of Factor Based Investing Strategies at BlackRock, in a note.

Related: A Growing Batch of Momentum ETFs

Supporting the ongoing growth in smart beta strategies, factors such as quality, momentum, value, size and minimum volatility have been drivers of returns across asset classes and helped shore up shortcomings of traditional market cap-weighted index funds.

“Unless there is a dramatic shift in the remaining days of 2016, MSCI Momentum Index will most likely underperform large-blend stocks in 2016. It is an interesting observation that the Momentum strategy underperformed in the years following a significant market pullback or sluggish return (02-03, 05-06, 08-09 and 11-12). It takes a two-year cycle for the Momentum Index to start outperforming again after experiencing a negative period,” according to Seeking Alpha.

For more information on alternative index-based exchange traded funds, visit our smart beta category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.