With momentum stocks proving their mettle in 2017, investors may want to eschew stock-picking and consider smart beta exchange traded funds with an emphasis on the momentum factor, including 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.
With MTUM, “you get exposure to large- and mid-cap US stocks exhibiting relatively high price momentum by tracking the MSCA USA Momentum Index which emphasizes stocks with high price momentum, but also maintains reasonably high trading liquidity, investment capacity and moderate index turnover,” according to a Seeking Alpha analysis of the ETF.
Investors often link momentum and growth stocks and while there are differences between the two investment factors, ETFs following those factors often have similar sector exposures. Notably, growth and momentum factors can and do expose investors to technology stocks. MTUM allocates over a third of its weight to that sector.
Financial services and consumer discretionary stocks combine for almost 38% of MTUM’s roster. Top 10 holdings in the ETF include Microsoft Corp. (NASDAQ: MSFT), Apple Inc. (NASDAQ: AAPL) and Nvidia Corp. (NASDAQ: NVDA).
Related: Searching For Opportunity With Value ETFs
“MTUM has gotten off to a great start since inception in 2013. But it will be interesting to see how it performs when we eventually experience a sharper, longer-lasting stock market correction. Because of its excellent performance, it has been steadily building its assets under management which have grown about $1.5 billion in the last year. As long as the fund inflows into MTUM continue, this should benefit the ETF’s performance,” according to Seeking Alpha.
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.
Additionally, momentum does not always mean increased volatility. MTUM’s three-year standard deviation of 9.8% is actually slightly below the comparable metric on the S&P 500.
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.
Tom Lydon’s clients own shares of Apple and Microsoft.