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.
Based on our research, MTUM’s holdings are appealing from both a valuation and risk perspective. The ETF earns a favorable rating input based on CFRA STARS, our qualitative, forward-looking assessment of the holdings, and on S&P Global Market Intelligence Quality Rankings, a review of the historical earnings and dividend record. Using the iShares Factor Box tool on the firm’s website, which can be used to understand the factor traits of many iShares and competing funds, MTUM offers strong momentum and quality characteristics, but weak value and low size traits.
Technology holdings include Cisco Systems (CSCO) and Intel (INTC), both CFRA Buy recommendations, as well as Microsoft (MSFT) and Mastercard (MA 191), both with above-average A- S&P Quality Rankings.
Within financials, CFRA Strong Buy recommended Bank of America (BAC) and Buy recommended JPMorgan Chase (JPM) were among the larger positions. CFRA Equity Analyst Ken Leon has a positive fundamental outlook for the Diversified Banks sub-industry, which includes BAC and JPM. Public policy reform of bank regulation is a key factor in CFRA’s positive view, and in April the Federal Reserve Bank issued proposals to simplify its capital rules for banks with revisions to its stress test rules.
Meanwhile, Amazon.com (AMZN) is the largest consumer discretionary stock in the portfolio. CFRA has a Buy recommendation on AMZN, expecting further domestic market share gains and potentially significant upside across several international markets from the rapidly growing Amazon Web Services business.
From a fund perspective, MTUM is also highly appealing to CFRA. The ETF is trading with bullish technical tendencies, with its price above its 200-day moving average. Meanwhile, the ETF has a modest 0.15% expense ratio and trades nearly 1 million shares daily with a tight penny bid/ask spread.
CFRA is presenting at the Inside Smart Beta conference in New York in early June to provide our take on the latest products. We think adoption of smart beta ETFs such as MTUM will continue to climb as advisors and investors become more aware of what’s inside these strategies.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.