Believe It: This Momentum ETF Is Still Working...Sort Of

To be clear, the iShares Edge MSCI USA Momentum Factor ETF MTUM has been 130 basis points less bad than the S&P 500 this month, but something is better than nothing and that something as it pertains to MTUM could be a positive sign for momentum stocks if the broader market rebounds.

What Happened

The $10.22 billion MTUM tracks the MSCI USA Momentum Index, “measures the performance of U.S. large- and mid-capitalization stocks exhibiting relatively higher momentum characteristics,” according to iShares.

Investors often conflate the growth and momentum factors, but in reality, momentum is highly sector agnostic. For example, if stodgy utilities stocks are displaying the best momentum traits leading into MTUM's rebalance, it's possible the ETF could be overweight that sector. That hasn't happened over MTUM's more than six years on the market and the ETF is heavily overweight tech at nearly 39%, but it has more defensive exposure than many investors may think it does.

Why It's Important

“High-momentum stocks have historically tended to outperform their lagging peers, but by just how much can depend on the macro environment,” according to Barron's.

For investors, considering MTUM doesn't mean a significant uptick in volatility. The fund's three-year standard deviation of 12.50% compares favorably with the category average and some large-cap tech strategies. Additionally, MTUM allocates about 21% of its weight to the defensive healthcare and consumer staples sectors.

By way of declining momentum in the energy patch, MTUM has no exposure to that sector and financials, another dog sector, represent less than 5% of the fund's weight.

What's Next

In another instance of “believe it or not,” the much ballyhooed inverted yield curve could actually be a positive signal for momentum stocks.

“Since 1978, when the yield on 10-year Treasuries has been more than 2 percentage points higher than the two-year yield, high-momentum stocks in the U.S. have outpaced the low-momentum group by an average of 3.4 percentage points in the following 12 months, according to a recent note from Oppenheimer analyst Ari Wald,” according to Barron's.

Data indicate the smart money is sticking by winners via MTUM. The ETF has hauled in over $581 million in new assets since the start of the third quarter.

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