MTUM ETF: A Solid Approach to Momentum Investor Investing

The momentum factor was beloved for much of this bull market. Then, the late 2018 market slump, led mostly by stocks with the momentum designation, plagued the momentum factor, but some exchange traded funds with exposure to this factor could be worth revisiting.

Consider the iShares MSCI USA Momentum Factor ETF (Cboe: MTUM), which provides targeted exposure to the momentum factor, a specific factor that has historically driven a significant part of companies’ risk and return. The $8.44 billion MTUM tracks the MSCI USA Momentum Index.

“iShares Edge MSCI USA Momentum Factor ETF MTUM is an effective strategy that should beat the market over the long term,” said Morningstar in a recent note. “It targets stocks with strong recent risk-adjusted performance, based on the idea that recent performance tends to persist in the short term.”

Investors often associate momentum with growth, meaning some market participants expect strategies like MTUM to be heavy on technology and consumer discretionary sectors. While those sectors combine for almost 27% of MTUM’s weight, the truth is the fund is sector agnostic. Currently, MTUM’s largest sector weigh is 30.66 to healthcare.

Momentum Factor Issues To Consider

“While momentum looks good on paper, it requires high turnover, which can create high transaction costs,” said Morningstar. “This fund mitigates those costs by rebalancing only twice a year and applying buffer rules to mitigate unnecessary turnover. These steps slightly dilute the portfolio’s exposure to the strongest-momentum stocks, but they should help performance by reducing costs.”

MTUM’s annual fee is just 0.15%, or $15 on a $10,000 investment, putting it at the favorable end of large-cap domestic smart beta strategies.

Momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that “the trend is your friend” and that stock market leaders typically continue to outperform. This type of strategy can be an effective way for targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.

“The fund’s focus on risk-adjusted performance also helps by reducing exposure to the most-volatile momentum stocks, which tend to struggle when the market volatility picks up,” according to Morningstar. “To further address the negative impact of market volatility, the fund’s benchmark rebalances in between the scheduled rebalancing dates if market volatility significantly increases. When this rebalancing is retriggered, the index focuses on more-recent momentum to construct its portfolio. This adjustment should help the fund during periods of high market volatility.”

For more information on alternative index-based strategies, visit our Smart Beta Channel.