The Trend Still May Be Your Friend

A look at how two momentum ETFs are doing in the bear market.

Momentum investing involves looking at what has been working, and presumes that it will continue to work in the future. However, the current bear market emerged so quickly that it caught many off guard.

Normally, it takes the market an average of nine months to eclipse the 20% decline threshold. Yet this sell-off took only 22 calendar days, making it the quickest collapse since WWII, according to CFRA Chief Investment Strategist Sam Stovall.

Not surprisingly, the defensive sectors held up best, as consumer staples, health care and utilities sectors lost the least, while the more cyclical energy, financials and industrials groups fell the furthest. Interestingly, two popular and CFRA five-star-rated momentum ETFs have distinct exposures to these sectors, highlighting the importance of knowing what’s inside.

Year to date through March 18, the SPDR S&P 500 ETF Trust (SPY) declined 25%, with a 29% loss in the past month alone. SPY is a market-cap-weighted ETF where the largest holdings have the highest market capitalization—achieved through long-term price momentum.

However, there are other smart beta ETFs known as momentum ETFs, and these are constructed based on the shorter-term movements of stock prices. Shareholders of these strategies believe the trend is their friend.

MTUM

The iShares Edge MSCI U.S.A. Momentum ETF (MTUM) is one such ETF that selects and weights based on six- and 12-month periods, though scaled by intermediate-term volatility and reconstituted every six months; its next portfolio adjustment is scheduled for May. MTUM has held up better than SPY in 2020, declining just 20% year to date and falling 27% in the past month, as it has been aided by its current defensive tilt.

Cyclical information technology (26% of assets) is the largest sector, followed by defensive sectors utilities (13%), real estate (11%), health care (11%), and consumer staples (10%). Meanwhile, cyclical industrials (7%) and energy (0%) exposure was relatively low; SPY has 25% in information technology, 16% in health care, 9% in consumer staples, 8% in industrials, 4% in utilities and 3% in real estate.

MTUM earns its CFRA five-star rating for positive reward and risk factors, including its holdings and recent performance record. Top holdings include Medtronic (MDT) and Microsoft (MSFT), which are CFRA Buy recommendations and have positive CFRA Earnings Scores.

PDP

Another CFRA top-rated ETF is the Invesco DWA Momentum ETF (PDP). The fund performed in line with SPY, falling 25% year to date through March 18. Yet this momentum ETF lagged in the past month, declining 31%. The fund’s high current exposure to cyclical sectors has had an impact.

PDP is based on 12-month relative strength and rebalanced at the end of each quarter. The fund has more exposure to information technology (35% of assets) and industrials (15%) and less exposure to utilities (3%) and consumer staples (3%). However, we would expect these weights will shift in a few weeks as the portfolio is reconstructed.

CFRA’s five-star rating is also driven by our view of the ETF’s risk and reward attributes. Apple (AAPL) and Mastercard (MA) are among its top positions.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Final Thoughts

MTUM’s net expense ratio is 0.15%, lower than PDP’s 0.62%, but higher than SPY’s 0.09%. However, as a review of the portfolio highlights, these ETFs have performed differently in the past month due to what’s currently inside the portfolios.

In addition, while SPY’s sector weights will shift in three months due to stock market movements, MTUM and PDP will be repositioned based on what stocks have recent relative strength.

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, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

Copyright © 2020 CFRA. All rights reserved. All trademarks mentioned herein belong to their respective owners.