A Fund with an Edge on Momentum

07/03/2017 2:56 am EST

Focus: FUNDS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Though we still look at momentum among the constituents of our Best Buys models and potential replacements, we have downgraded its importance in recent years, says Mark Salzinger, editor of The No-Load Fund Investor.

Meanwhile, several ETFs are still based on the maxim that stocks with strong momentum tend to continue outperforming.

The largest by assets is likely iShares Edge MSCI Momentum Factor (MTUM), which we track in the Aggressive Growth category of our Performance Comparison tables.

Instead of a simple price momentum calculation, the index mimicked by this ETF includes stocks based on a complicated method that attempts to capture risk-adjusted momentum.

Stocks are favored based on six- and 12-month relative price strength, divided by volatility over the past three years. The ETF includes between 100 and 350 midsize and large-cap stocks.

Perhaps more complicated strategies incorporating momentum can still work, even if simple ones may not. That of MTUM certainly has.

Though the ETF gained only 5.0%in 2016, vs. 12.0% for the S&P 500, it has made up for that shortfall so far this year. Through May 31st, the ETF is up 17.4%, vs. 8.7% for the index.

Over the past three years, it has produced an annualized gain of 14.1%, vs. 10.1% for the S&P 500. The current portfolio of MTUM is an odd mix.

While we aren’t surprised that technology stocks account for nearly a third of assets, we are that financial services stocks take up nearly a quarter.

Industrial and healthcare stocks combine for almost another  quarter, while consumer staples (surprisingly, given pretty good performance among some such stocks) and energy stocks (not surprising, given lousy recent performance and high volatility) account for virtually nothing.

Though the current portfolio is slanted toward large-cap growth stocks that have been leading the market so far this year, it wouldn’t be fair to ascribe all of its recent advantage to investment style.

According to Morningstar, value stocks currently account for a quarter of assets of the ETF, while stocks with a combination of growth and value characteristics get 27%.

In fact, the overall price/earnings ratio of MTUM is a smidgen under 20, just about the same as that of the S&P 500, while the volatility of the ETF has actually been lower than that of the index. While we are generally wary of ETFs with unusual investing strategies, this product is definitely one to consider.

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