ETF Trends
ETF Trends

Another recent blip directed at Internet and technology stocks could present challenges for smart beta momentum strategies, but those constructed the right way could prove durable. For example, the iShares MSCI USA Momentum Factor ETF (NYSEArca:MTUM) is still up 18% year-to-date and has some pleasant surprises that could prove effective over the long-term.

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.

“Momentum has historically outrun the broader market, but with periodic sharp drops,” said BlackRock in a recent note. “The biggest dips in the performance of the MSCI ACWI Momentum Index relative to the MSCI ACWI Index have mostly coincided with recessions and financial crises, as the chart shows. Our research shows that momentum tends to perform the best during sustained economic expansions. We are in such a phase, and we see this cycle having ample room to run.”

The momentum strategy basically bets that hot movers will continue to rise, so investors would buy high and sell even higher. Investors who want to follow this momentum strategy will be betting on outperforming sectors flying even higher.

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.

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