Among individual investment factors, momentum is delivering for investors this year. For example, the iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM) is higher by 18% since the start of the year and recent data suggest momentum stocks are on an uncommon winning streak.
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.
“It’s the sudden torridness of momentum shares, which through last week quietly staged their longest streak of gains in a quarter century. The MSCI U.S. Momentum Index, which tracks companies with the most price appreciation in the last two to 12 months, rallied 11 straight days through Friday, the longest stretch since October 1992,” reports Lu Wang for Bloomberg.
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.
Like many momentum strategies, MTUM is heavily allocated to technology and consumer discretionary stocks. Those sectors combine for 47.3% of the ETF’s weight, but the surprise is MTUM’s 23.1% weight to financial services stocks, a sector that has lacked momentum this year.