A Momentum ETF Tries To Keep Its Edge

The blip recently experienced by some marquee internet and technology stocks appears to be just that. Last week, the Nasdaq-100 gained 2.2 percent and some exchange-traded funds dedicated to growth and momentum stocks remain high fliers.

For example, the iShares Edge MSCI USA Momentum Factor ETF MTUM is flirting with a year-to-date gain of 19 percent. Among smart beta ETFs emphasizing individual investment factors, MTUM is one of the darlings among momentum strategies as highlighted by the fund's more than $3.1 billion in assets under management in just over four years on the market.

MTUM tracks the MSCI USA Momentum Index and there is little in the way of perceived momentum surprises in the ETF or its underlying benchmark. The ETF follows the MSCI USA Momentum Index and holds 124 stocks.

Risks And Rewards With Momentum

“There is also a trade-off between active risk and potential returns,” said Morningstar in a recent note. Funds that pursue momentum more aggressively have a greater risk of significantly underperforming the market when momentum is out of favor, though they should also have higher returns over the long term.”

At the sector level, pillars of momentum strategies are usually technology and consumer discretionary stocks. MTUM does not disappoint on that front as those sectors combine for almost 46 percent of the ETF's lineup. None of MTUM's holdings account for more than 5 percent of the funds weight. Well-known constituents in the ETF include Microsoft Corporation MSFT, Apple Inc. AAPL and NVIDIA Corporation NVDA.

MTUM “ranks stocks by their price returns over the past seven and 13 months (excluding the most recent one), scaled by their volatility over the past three years. It is a bit odd that there is a mismatch between the periods over which the fund measures return and volatility,” said Morningstar.

Pleasant Volatility Surprise

While conventional wisdom holds that momentum stocks are usually more volatile than the broader market, that is not the case with MTUM. MTUM's three-year standard deviation of 9.8 percent is actually below the comparable metric on the S&P 500. Over the past year, MTUM has been slightly less volatile than the Vanguard Growth ETF VUG.

MTUM's “>risk-adjustment should help the fund avoid loading up on the riskiest names during bull markets, which tend to underperform during market reversals,” said Morningstar. “It should also increase the fund’s exposure to stocks with momentum that is more likely to persist.”