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.”
The $3.5 billion MTUM, which is up nearly 23% year-to-date, is typical of many momentum strategies with large combined weights to the technology and consumer discretionary sectors. Those sectors are usually hallmarks of momentum-based funds and combine for over 46% of MTUM’s roster. Interestingly, the ETF devotes over a quarter of its weight to financial services stocks, a sector that is usually a staple in value funds. MTUM holds 123 stocks.
Related: A Pure Value Idea in the Smart Beta Space
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.
“Momentum factor investing tends to be highly cyclical and focused on a concentrated portfolio of stocks displaying stronger price appreciation than their peers,” according to BlackRock. “This exposure directly maps to the investment characteristic that has driven returns for active growth managers in the past.”
MTUM, which debuted in April 2013, has added $1.1 billion in new assets this year,or nearly a third of its assets under management tally.
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.