Among individual investment factors, momentum is delivering for investors this year. For example, the iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM) is higher by 18% since the start of the year and recent data suggest momentum stocks are on an uncommon winning streak.
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.
“It’s the sudden torridness of momentum shares, which through last week quietly staged their longest streak of gains in a quarter century. The MSCI U.S. Momentum Index, which tracks companies with the most price appreciation in the last two to 12 months, rallied 11 straight days through Friday, the longest stretch since October 1992,” reports Lu Wang for Bloomberg.
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.
Like many momentum strategies, MTUM is heavily allocated to technology and consumer discretionary stocks. Those sectors combine for 47.3% of the ETF’s weight, but the surprise is MTUM’s 23.1% weight to financial services stocks, a sector that has lacked momentum this year.
Other momentum ETFs reside near new highs as well. The Powershares DWA Momentum Portfolio (NASDAQ: PDP), which utilizes technical analysis from Dorsey Wright and picks out stocks based on relative strength, was one of the momentum ETFs to reach record highs.
PDP tracks the Dorsey Wright Technical Leaders Index, which usually includes 100 Nasdaq-listed companies.
“The Index is constructed pursuant to Dorsey, Wright & Associates, LLC’s proprietary methodology, which takes into account, among other factors, the performance of each of the approximately 1,000 largest companies in the eligible universe as compared to a benchmark index, and the relative performance of industry sectors and sub-sectors,” according to PowerShares.
“The momentum trade is back after the strategy suffered one of the worst years on record in 2016 as investors sought safety in low volatility and later Trump-trade stocks. A clinging to winners has been on display throughout 2017 as technology shares kept building on gains amid mounting demand for growth stocks,” according to Bloomberg.
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