Many ETFs focusing on the momentum factor are heavily allocated to the FAANG stocks, a trait that makes those funds vulnerable when one or several of the FAANG stocks pullback.
That was the case last week when scores of technology and momentum ETFs were punished after Facebook (FB) suffered its worst intraday loss in its history as a public company. Last Friday, the social media giant lost roughly $120 billion of its value, marking the largest market capitalization loss in history.
Some momentum ETFs were able to weather the Facebook storm. That group includes the iShares MSCI USA Momentum Factor ETF (Cboe: 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.
MTUM is down less than 2% over the past week, a modest decline compared to other tech-heavy and momentum-based funds.
How MTUM Remained Firm
“Facebook is a prominent growth stock, widely held across active managers,” said BlackRock in a recent note. “Many investors turn to the growth category of the style box to help harness market trends, participate in positive investor sentiment, and seek financially stronger companies…those worth paying more for. A factor lens can help determine which stocks are worthy of a higher premium.”
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Currently, Facebook is not among MTUM’s top 10 holdings. Just FAANG stocks – Amazon.com Inc. (NASDAQ: AMZN) and Netflix, Inc. (NASDAQ: NFLX) – are among MTUM’s top 10 holdings, but that pair combines for just 9% of the ETF’s weight. MTUM holds 124 stocks and Facebook currently does not reside in the fund.
“Momentum strategies track price trends, a measure of investor sentiment. Many breakout stocks across a variety of industries have earned exceptional returns over the last 6 to 12 months–the time frame generally employed by momentum strategies like the iShares Edge MSCI USA Momentum ETF (MTUM),” according to BlackRock.
MTUM’s total FAANG exposure is just 9% compared to nearly 39% in the Nasdaq-100 Index. As is the case with many growth and momentum strategies, MTUM is heavily allocated to the technology and consumer discretionary sectors. Those sectors combine for over 60% of MTUM’s weight.
For more information on alternative index-based exchange traded funds, visit our smart beta category.