Smart Beta Channel

What Makes This Momentum ETF Tick

Due in large part to the ascent of some well-known Internet and technology stocks, the growth and momentum factors have been performing well this year. That theme did, however, recently take some heat as the FANG stocks retreated, reminding investors that they should examine momentum-based strategies before jumping in.

Even with some recent pressure on momentum stocks, the iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM) is up nearly 19% year-to-date. 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.

MTUM is among the many momentum ETFs that prove momentum can mean much more than just a high beta from a sexy sector. Momentum can also mean an emphasis on relative strength and strong price characteristics.

“This risk-adjustment should help the fund avoid loading up on the riskiest names during bull markets, which tend to underperform during market reversals,” said Morningstar in a recent note. “It should also increase the fund’s exposure to stocks with momentum that is more likely to persist. This is because stocks with steady price improvement are more likely to enjoy gradual improvements in fundamentals that investors may underappreciate than those with greater volatility.”

The $3 billion MTUM follows the MSCI USA Momentum Index and holds 124 stocks. As is par for the course with many growth and momentum strategies, MTUM features large weights to the technology and consumer discretionary sectors. Alone, technology is almost 32% of the ETF’s weight while consumer cyclicals represent over 14%.

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.

MTUM’s “concentration gives the fund slightly greater exposure to firm-specific risk than its peers, though it appears manageable. Despite this concentration, the fund has exhibited lower volatility than its peers, owing to its risk-adjusted selection criteria. The combination of its cost advantage, strong exposure to the momentum factor, and cost-efficient implementation make this the most attractive momentum ETF, in Morningstar’s view,” according to the research firm.

MTUM charges just 0.15% per year, which is a below average fee among smart beta ETFs.

For more information on alternative index-based exchange traded funds, visit our smart beta category.