Popular Momentum ETF Gains Over $3B YTD Flows

By Todd Rosenbluth, CFRA

The CFRA Focus ETF for June is iShares Edge MSCI USA Momentum ETF (MTUM), which earns our top rating of Overweight. Rather than rely on past performance, CFRA rates more than 1,100 equity ETFs with a focus on what’s inside and related fund costs. MTUM rates favorably using various inputs.

MTUM has been one of the more popular ETFs to start the year, gathering $3.1 billion year-to-date through May 25. The ETF has performed well, rising 8.4%, ahead of broadly diversified US index ETFs and large-cap growth mutual funds. Moreover, CFRA thinks the holdings remain compelling going forward.

The index behind this ETF follows what we would refer to as a “let-your-winners-run” approach, supported by academic research. Stocks are included if they have exhibited strong price momentum and the index is rebalanced on a semi-annual basis. Unlike some of iShares factor ETFs, there are no sector bands and there can be significant over- or underweights relative to more diversified ETFs.

Related: 5 Top ETF Ideas for the Quarter Ahead

Currently the ETF is heavily weighted to information technology (37% of assets), financials (19%), consumer discretionary (16%) and industrials (14%), while exposure to consumer staples (2%) and energy (1%) is limited; there are no telecom services or utilities stocks inside.

CFRA thinks technology sector earnings growth expectations for 2018 and 2019 are significantly underestimating the potential of the sector. Tech sector companies have consistently beat expectations in each of past seven quarters, yet recently 2019 earnings growth forecasts remained below the S&P 500 index.