“Success leaves clues, and if you sow the same seeds, you reap the same rewards.”
— Brad Thor, New York Times bestselling American novelist
Today’s market has no shortage of growth opportunities. The tricky part for investors lies in knowing exactly where to sow in order to reap the greatest returns. And where better to start looking for a bountiful harvest than with the areas that have performed best recently?
“Momentum factor” investing is built around the dynamic that market leadership often persists, rewarding those who stay invested in areas of demonstrated strength. Its strategy revolves around the idea that assets that have outperformed others will continue to do so, and assets that have underperformed will continue to perform poorly.
One way to invest using this strategy is with this week’s ETF, the iShares MSCI USA Momentum Factor ETF (MTUM). This fund seeks to track the MSCI USA Momentum Index, which provides exposure to large- and mid-cap U.S. stocks that have exhibited strong recent performance, giving investors a chance to capitalize on the latest market trends and add some proven winners to their portfolio.
The fund will generally invest at least 80% of its assets in the index’s component stocks or in similar investments. It selects and weights stocks by examining their six- and 12-month holding period returns, scaled by the volatility of returns over the past three years. Because of MTUM’s focus on recent outperformers, its holdings are concentrated primarily in the technology, financials and industrials sectors. Its exposure is maintained through quarterly rebalancing.
The top 10 holdings constitute approximately 39.57% of the fund’s assets and include Broadcom Inc. (NASDAQ: AVGO), 5.71%; JPMorgan Chase & Co. (NYSE: JPM), 4.92%; Meta Platforms, Inc. (NASDAQ: META), 4.72%; Microsoft Corporation (NASDAQ: MSFT), 4.64%; NVIDIA Corporation (NASDAQ: NVDA), 4.4%; Palantir Technologies Inc. (NASDAQ: PLTR), 4.15%; Oracle Corporation (NYSE: ORCL), 2.86%; Advanced Micro Devices, Inc. (NASDAQ: AMD), 2.82%; Alphabet Inc. (NASDAQ: GOOGL), 2.79% and GE Aerospace (NYSE: GE), 2.55%. MTUM has net assets of around $20.43 billion and an expense ratio of only 0.15%, making it a cost-effective way to gain exposure to momentum-focused stocks.
Chart courtesy of www.stockcharts.com.
MTUM has demonstrated relatively strong performance recently and has proven itself capable of living up to its name by quickly regaining momentum after its steep drop in April. It is down 1.59% in the last month but is up 2.89% in the last three months and 21.75% year to date.
However, something to consider regarding this fund is that momentum cycles and “harvests” in the market can be quite unpredictable, as the recent winners that momentum factor ETFs chase are never guaranteed to continue performing well. Because of this, these funds are known for their high levels of risk and volatility.
Investors’ preferences and risk tolerance may not align with MTUM’s strategy if they are looking for steadier, lower-risk options. Investors should always do their due diligence and research before adding any stock, fund or ETF to their portfolio to ensure they sow their seeds in a place that best suits their investing goals.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
