MTUM; the momentum ETF

If you have ever invested in stock market, you probably have seen some stocks go down despite solid earnings and fundamentals. After all, stock market is not an exact science and investor bias plays an important role in valuations and stock performance. There is no doubt that some stocks acquire upward momentum and perform better than expected. If you want to invest in momentum stocks there is a smart beta ETF worth your time. It is called MTUM by iShares, and we are going to see why this ETF is an above average fund.

MTUM: iShares Edge MSCI USA Momentum Factor ETF

Let's start by looking at the objective of this ETF. It provides exposure to large-cap and mid-cap U.S. stocks exhibiting relatively higher price momentum. It tracks MSCI USA momentum Index and currently has 123 holdings. Its expense ratio is 0.15%, and it was incepted on December of 2013. Now, let's talk about its stock picking methodology (that is where the magic happens). MTUM's benchmark index determines a momentum value for all the stocks by combining their recent 12-month and 6-month price performance. This momentum value is then risk-adjusted to determine the stock’s momentum score. The top 30% of the stocks are chosen and weighted based on their momentum score and market cap. No constituent is given more than 5% of the index weight. Stocks chosen should also have low volatility in the last 3 years, and rebalancing of the index is semiannually. 

It sounds great, but how should this ETF be used? MTUM is part of an investment style called Factor ETF investing. In another post we talked about Factor ETFs, but to make it short, these Factor ETFs are designed to perform in different market conditions. At the end of a recession, value stocks and smaller companies historically rebound the most, so iShares has VLUE and SIZE ETFs for that time frame. As the recovery continues and market gets stronger, some stocks gain momentum, and that is when MTUM performs the best. Then comes the market slow down and contraction, and for this late cycle ups and downs, iShares has QUAL and USMV, which are quality and low volatility factor ETFs, respectively. Therefor, in the middle of the bull run, MTUM should perform better than the broad market.

When it comes to performance, MTUM has been an impressive ETF. Its YTD performance is 32% (S&P 15.5%), 1 year performance is 33.85% (S&P 19%), and a cumulative 3 year return is 50% (S&P 26%). This ETF is truly a smart beta, and during the intended time-frame (middle of bull run), it easily outperformed the market. However, it is worth noting that when the next correction/recession happens, the better performing ETFs will probably drop the most. If you are actively investing in stock market, you should remember that during a bear market, any smart beta can significantly underperform the broad market. 

Disclosure: At the time of this publication I am long MTUM. This publication is NOT intended as financial advice. Published statements are opinions only.