Harnessing Momentum ETF Up 23% YTD

With value stocks continue to lag their growth and momentum counterparts, some investors may opt to isolate higher beta factors with select exchange traded funds. Investors looking to focus on the momentum factor can consider the iShares MSCI USA Momentum Factor ETF (BATS: 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.

“Traditional growth investing seeks capital appreciation by investing in companies that have high expected earnings and may steadily increase in value,” said BlackRock in a recent note. “Similarly, the momentum factor targets stocks that are trending up in price. In other words, the term ‘momentum’ is a new way to describe what many growth managers have historically tried to deliver.”