There Is a Bull Market Somewhere | ETF Trends

With the S&P 500 Index down sharply in 2022, it is easy to lose track of not all large-cap stocks down by a double-digit percentage. Indeed as of mid-May, there were 60 stocks up more than 10% and 32 up more than 20% for the year. 

While certain prior market darlings in the consumer discretionary, health care, and information technology sectors, such as Applied Materials (AMAT), Ford Motor (F), and Moderna (MRNA), are in a bear market territory, boring consumer staples and inflation-sensitive energy stocks have climbed sharply.

You probably know that shares of energy companies like Exxon Mobil (XOM), Marathon Oil (MRO), and Valero Energy (VLO) are up significantly this year. But, how about consumer staples stocks like Archer-Daniels-Midland (ADM), Kraft Heinz (KHC), or Kroger (KR)?

Momentum investing has been around for decades, but through ETFs advisors can let the trend be their friend, own a portfolio of stocks that have demonstrated relative strength and skate to where the action recently has been. However, many of these ETFs track an index that is reconstituted periodically, meaning that sometimes they need to catch up to the latest market sentiment.

For example, the iShares MSCI USA Momentum Factor ETF (MTUM), which manages $10 billion in assets, is reconstituted semi-annually. When this was last done in November 2021, growth companies were still in vogue as inflation and Treasury bond yields were much lower. As a result, MTUM is currently skewed more toward Information Technology stocks (31% of recent assets) and away from Consumer Staples (4%) relative to the iShares Core S&P 500 ETF (IVV).  MTUM was, however, overexposed to Energy (7% vs. 4%) with stakes in still strong performing ConocoPhillips (COP) and Occidental Petroleum (OXY).

When MTUM rebalances at the end of May, sector weightings are likely to shift with a reduction in Information Technology and a boost to Consumer Staples, as companies like ADM, KHC, and KR are not currently inside. Within sectors, change is also likely as MTUM owned struggling MRNA, but not top performing sector peer Bristol Myers Squibb (BMY).

Contrasting MTUM with the Invesco DWA Momentum ETF (PDP), a $1.1 billion ETF that reconstructs quarterly with the next one in June, we can see what a difference a few months in the market make. PDP currently has a higher 19% weighting in Energy. 

Other high momentum ETFs include the Alpha Architect U.S. Quantitative Momentum ETF (QMOM), the JPMorgan U.S. Momentum ETF (JMOM), and the SPDR Russell 1000 Momentum Focus ETF (ONEO)

Year-to-date, traffic toward MTUM slowed significantly on the ETF Database platform compared to the same period a year earlier. Meanwhile, sentiment was relatively stronger for the iShares MSCI USA Value Factor ETF (VLUE). Like MTUM, VLUE is also reconstituted at the end of this month, but this smart-beta ETF has sector constraints. It will soon shift to more attractively valued stocks within consumer staples or information technology, but the sector weightings will largely be stable. 

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