The sector trend continues to be your friend heading into year-end, but ETF-focused advisors would be wise to dive deeper. When the largest U.S.-listed momentum ETF, the iShares MSCI USA Momentum Factor ETF (MTUM), was rebalanced at the end of November, many of its largest positions were sold to make room for more recent winners.
With $12 billion in assets, MTUM is one of the largest factor ETFs, and it is built on the premise that stocks with strong price momentum can continue to outperform in the months ahead, as indicated by academic research. However, the MSCI index-based MTUM is reset every six months, at the end of May and the end of November. Some of the first-half 2022 market leaders remain in the portfolio, but room was also made for the next generation. Unlike some other iShares single-factor ETFs, there are no sector constraints to MTUM.
A few years back, there was an effort to shift the focus from style investing to factor investing by claiming that momentum was an alternative to growth investing. At the time, momentum indexes were favoring traditional growth sectors like consumer discretionary and information technology; prior to its May 2021 rebalance, MTUM had a 42% stake in information technology. However, in 2022, momentum ETFs like MTUM look more like a traditional value ETF at the sector level.
Prior to the recent month-end rebalance, MTUM’s largest sector weights were in healthcare (33% of assets), energy (23%), and consumer staples (11%), with information technology and consumer discretionary the fifth- and seventh-largest with only 6.3% and 4.7% of assets, respectively.
Little changed for the top two sectors following the November rebalance, with the healthcare stake nudging up to 36% of MTUM assets, and energy mostly holding steady at 24%. However, consumer staples and information technology fell to 6.4% and 4.4%, respectively, while consumer discretionary rose to 6.9%.
At the stock level, some previous top-10 holdings were sold from the iShares ETF, including Apple (5.0% stake on November 27), Johnson & Johnson (4.2%), Berkshire Hathaway (4.0%), Procter & Gamble (3.9%), and CostCo Wholesale (3.0%), while others like Exxon Mobil, Chevron, and UnitedHealth Group remained.
Taking the place of some of the heavyweights for MTUM were more moderately sized stronger performers like Automatic Data Processing (1.1%), Cigna (1.9%), Gilead Sciences (1.9%), Humana (1.0%), and McDonalds (2.3%), as well as smaller companies like First Solar (0.4%), Molina HealthCare (0.2%), and Motorola Solutions (0.5%).
While MTUM rebalances semi-annually, other momentum ETFs are updated quarterly and use different selection criteria. As such, they look different.
The largest sector weights for the Invesco DWA Momentum ETF (PDP) at the end of November were information technology (25% of assets), energy (18%), and industrials (17%), with just 2.0% invested in consumer staples stocks. Apple, for example, remains a part of PDP.