The iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM) is up more than 17% year-to-date, a gain that shows this smart beta exchange traded fund is outpacing the S&P 500 a roughly 2-to-1 margin. However, there are some concerns regarding the near-term outlook for the momentum factor and its ability to continue outpacing more conservative investment factors during the sluggish summer months.
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 has enjoyed a perfect storm of market conditions lately, but it’s worth asking if other factors are ready to begin leading again. If volatility remains muted, it’s reasonable to think that momentum could continue to extend its gains, but there are a few circumstances to consider that could point to a change in leadership,” reports ETF Daily News.
MTUM, which debuted four years ago, holds 124 stocks. Some of the ETF’s sector weights are not surprising while others are. For example, as a momentum-based ETF, it is not surprising that MTUM allocates about 47% of its combined weight to technology and consumer discretionary stocks. The surprise is MTUM’s 23.2% weight to financial services stocks. That is the second-worst performing sector in the S&P 500 this year, trailing only energy.