The iShares MSCI USA Momentum Factor ETF (Cboe: MTUM), one of the largest exchange traded funds dedicated to the momentum factor, is up more than 18% this year, proving its resilience in the face of some headwinds for some high beta stocks.
MTUM’s fortitude could be imminently tested amid a slew of third-quarter earnings reports from growth and momentum stocks are due out in the coming weeks.
While momentum strategies are sector agnostic, these funds are often light on defensive sectors, groups that could be advantageous to investors in the current market environment. For example, the healthcare, consumer staples, and utilities sectors combine roughly just a quarter of MTUM’s roster. Conversely, MTUM allocates nearly 39% of its weight to technology stocks.
“After leading markets in the past six months, the MTUM momentum ETF has taken a back foot in October. The ETF, which holds Salesforce and PayPal among its top holdings, is down 1% this month, while the S&P 500 has added 0.5%,” according to CNBC.
An Issue For Investors
An issue for investors is when funds like MTUM increase or decrease exposure to the technology sector. The momentum factor was beloved for much of this bull market. Then, the late 2018 market slump, led mostly by stocks with the momentum designation, plagued the momentum factor, but some ETFs with exposure to this factor could be worth revisiting.
“They’re definitely in for a test right here. What we’ve seen over the course of the last eight to 10 weeks is a lot of volatility,” Danielle Shay, director of options at Simpler Trading, said in an interview with CNBC.
Momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that “the trend is your friend” and that stock market leaders typically continue to outperform. This type of strategy can be an effective way for targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
“Microsoft and Amazon are set to report earnings next week, while Google parent Alphabet will release its results the week after, on Oct. 28,” according to CNBC.
Microsoft is MTUM’s second-largest holding at a weight of 5.33%.
For more information on alternative index-based strategies, visit our Smart Beta Channel.
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.