This De-FAANGed ETF Avoided Facebook's Slump

Typically, when investors think about the momentum factor and the corresponding exchange traded funds, they think about products with substantial allocations to Internet and technology stocks. These days, that means the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks.

Of course, when one or some of the FAANG stocks slide, funds with large exposure to those names are punished as well. That much was seen July 26 when Facebook Inc. FB endured its worst intra-day loss as a public company.

What Happened

Facebook-heavy ETFs were pummeled. Just look at the new Communication Services Select Sector SPDR XLC, which entered the day allocating over 20 percent of its weight to shares of the social media giant. Some momentum strategies were able to avoid the Facebook-induced carnage.

Enter the iShares Edge MSCI USA Momentum Factor ETF MTUM. No, MTUM hasn't been excluded from the Facebook sell-off, but the ETF's 2.32-percent loss over past week compares favorably with the Nasdaq-100 Index, which is lower by 2.48 percent over the same span.

Why It's Important

“Facebook is a prominent growth stock, widely held across active managers,” said BlackRock in a Monday note. “Many investors turn to the growth category of the style box to help harness market trends, participate in positive investor sentiment, and seek financially stronger companies…those worth paying more for. A factor lens can help determine which stocks are worthy of a higher premium.”

In plain English: Yes, MTUM is a momentum ETF and yes, it has some FAANG exposure, but Facebook isn't among the ETF's 124 holdings. In fact, MTUM's total FAANG exposure is about 9.2 percent, all of which is allocated to Amazon.com Inc. AMZN and Netflix, Inc. NFLX.

Conversely, the largest actively managed growth mutual funds have a median FAANG weight of almost 21 percent while the Nasdaq-100 Index devotes almost 39 percent of its combined weight to the FAANG quintet, according to BlackRock data.

What's Next

Making MTUM's relative lack of FAANG exposure all the more interesting is that the ETF's largest sector allocation is technology at 40.92 percent, or more than double the fund's second-largest sector exposure, consumer discretionary.

“Investors have seemingly been more skeptical of Facebook’s forward-looking prospects post privacy scandal, and while the stock earned positive returns in the first half of the year it lagged many of the truly breakout names that dominated market returns in 2018,” said BlackRock. “As a result, MTUM has no exposure to the stock.”

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