- The iShares Edge MSCI USA Momentum ETF (MTUM) will be reconstituted at the end of May based on six- and 12-month performance data through April. With market sentiment shifting from growth to value, CFRA expects turnover to occur.
- We think current top-10 holdings Amazon.com (AMZN) and Thermo Fisher Scientific (TMO) are at risk of being removed from the index-based ETF given relatively weak performance records.
- Meanwhile, we think MTUM’s miniscule stake in financials will be boosted and the ETF will reinitiate energy positions. Capital One Financial (COF), Devon Energy (DVN), EOG Resources (EOG) and Wells Fargo (WFC) are some potential additions, according to our analysis.
Demand for a momentum-based strategy has continued in 2021. iShares offers four U.S.-focused factor ETFs positioned to potentially generate stronger returns than the broader market. In 2020, MTUM was the third most popular, behind the iShares Edge MSCI USA Value Factor ETF (VLUE) and the iShares Edge MSCI USA Quality Factor ETF (QUAL).
Year-to-date through April 23, MTUM gathered approximately $785 million of additional money, second behind only VLUE’s $3.1 billion cash haul, while QUAL and the iShares Edge MSCI USA Size Factor ETF (SIZE) incurred outflows. A rotation between factors is normal, reflecting a fluid economic outlook and shifting risk tolerance.
Figure 1: Demand For iShares US Factor ETFs ($B)
Source: CFRA ETF Database. As of April 23, 2021.
MTUM last rebalanced in November when growth stocks were still benefiting from a COVID-19-driven stay-at-home economy. The $15 billion smart beta ETF climbed 52% in the 12 months ended April 23, in line with the S&P 500 Index, but MTUM has trailed year to date, rising just 7.9% and lagging the 12% gain for the broad U.S. benchmark.
Currently, MTUM is heavily weighted to growth stocks in the information technology (42% of assets), consumer discretionary (20%) and health care (12%) sectors, with minimal exposure to traditionally value-oriented financials (1.5%) and no energy sector holdings.
Unlike other U.S. factor ETFs offered by iShares, there are no sector constraints for MTUM, which allows the ETF to semiannually adjust based on where the momentum is strongest. CFRA expects this exposure to shift when MTUM is reconstituted at the end of May. Since November, the energy and financials sectors have demonstrated relative strength compared to health care and information technology. Meanwhile, there has been a rotation within the consumer discretionary sector’s leadership.
Figure 2: Sector Breakdown Of MTUM (% of assets)
Source: CFRA ETF Database. As of April 23, 2021.
MTUM focuses on stock-specific six- and 12-month performance records. The MSCI index is constructed in part using price performance data one month prior to the rebalancing date with the security weightings based on a combination of a momentum score and the market capitalization weight of the stock within the parent MSCI USA index.
The heftiest positions in the ETF are large-cap stocks that previously demonstrated relative strength, but the ETF holds approximately 125 total securities, many within the mid-cap sphere. High turnover is to be expected, even as the benchmark provider uses buffer rules to limit the number of semi-annual changes.
In Figure 3, we highlight the ETF’s recent top-10 holdings and their 6- and 12-month performance as of April 23, one week ahead of the review period. While we are not attempting to calculate the future weightings of MTUM, a review of the recent records helps identify what stocks are most likely to remain in the portfolio following the May reconstitution and what stocks have a greater risk of being removed.
AAPL and TSLA’s standing in MTUM seems more secure than AMZN’s and TMO’s. As of April 23, TSLA and AAPL were up 403% and 91%, respectively, for the previous 12 months, with the automobile manufacturer also generating an impressive 80% in the six-month period just ahead of the latest earnings results. APPL’s strong 12-month performance was exceeded by 100%-plus gains by fellow information technology constituents and top 10 holdings NVIDIA Corp (NVDA) and PayPal Holdings (PYPL), but we think AAPL is likely secure. MTUM’s top 10 holdings recently represented 42% of its assets.
In contrast, previously strong performing AMZN and TMO fell out of favor in the last six months, placing them in danger of being removed from the index. AMZN was up just 5.6%, while TMO increased only 2.5%, with both rising less than 50% in the past year. AMZN and TMO were recently 4.6% and 2.8% of MTUM assets, respectively.
Outside of the top 10, CFRA thinks current positions in Costco Wholesale (COST), Netflix (NFLX), Nike (NKE), and NextEra Energy (NEE) could also be replaced in MTUM based on relatively weak 6- and 12-month performance records. These stocks were hurt as sentiment shifted from the so-called stay-at-home names to those well positioned for a global economic recovery as people prepare to leave their homes after receiving a Covid-19 vaccine.
Figure 3: Recent Performance for MTUM’s Top-10 Company Holdings
Source: CFRA ETF Database. Capital IQ. As of April 23, 2021
Meanwhile, COF and WFC could be added to MTUM at the next rebalance. There are currently just five financial stocks in MTUM, with BlackRock (BLK) and MSCI (MSCI) coincidentally the two largest based on an objective run of past performance data. However, $180 billion WFC and $60 billion COF could soon join these mega-cap companies based on the latest returns. WFC climbed 109% in the last six months and was up 68% in the past year, while COF’s gains of 89% and 145% were similarly impressive. We also think Invesco (IVZ), Lincoln National Corp (LNC), and SVB Financial Group (SIVB) could be added given their relative strength. We see a high likelihood that MTUM’s 1.5% Financials weighting is at least in the mid-single digits at the next reconstitution.
There will soon be some energy exposure in MTUM as many stocks have doubled in value in the past six months. DVN, EOG, Occidental Petroleum (OXY), and Valero Energy (VLO) all rose by more than 100%, with Hess Corp (HES) and Marathon Petroleum (MPC) not far behind. The current absence of any energy exposure for MTUM hurt relative performance to start 2021, but if the sector’s gains persist this summer, we think the factor ETF will benefit as we expect MTUM’s energy weighting to be higher than the 2.6% current stake for the S&P 500 Index when the fund is rebalanced.
In addition, a shift in consumer sentiment will likely be reflected in MTUM. While MTUM does not need to maintain a hefty stake in Consumer Discretionary as it has no sector bands, the potential removal of AMZN could push down the current 20%-of-assets weighting. However, based on recent performance, we think leisure companies Carnival Corp (CCL), Expedia Group (EXPE), and MGM Resorts International (MGM) could be added to the ETF as that these stocks more than doubled in value in the last 12 months.
CFRA’s ETF ratings combine fund-specific metrics with holdings-level analysis. Our four-star rating on MTUM is driven by the strong reward potential and risk-mitigation of the current, not the future portfolio. Some of the potential replacements we identified are attractive based on CFRA’s qualitative and quantitative assessments, while others are less appealing. We will review the full portfolio following MTUM’s end of May reconstitution. We also expect changes to be made at more moderately sized momentum ETF peers including Invesco DWA Momentum ETF (PDP), Invesco S&P 500 Momentum ETF (SPMO) and SPDR S&P 1500 Momentum Tilt (MMTM) to reflect a shift in market leadership.
Figure 4: Potential Additions to MTUM
Smart-beta ETFs, such as MTUM, are not static and are periodically reconstituted and rebalanced to reflect changes in fundamentals or stock price movements. Therefore, a holdings-based approach makes sense for conducting analysis. What is inside MTUM today is likely to be different than in a few weeks.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.
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