When it comes to single-factor investing, growth and momentum ETFs have performed very well this year, and have attracted significant assets along the way. The lineup of growth and momentum ETFs, however, couldn’t be more different, making choosing a fund to ride the wave potentially tricky.
From a performance perspective, both growth and momentum are benefiting from a slow-and-steady economy, according to Russ Koesterich, portfolio manager for BlackRock’s Global Allocation team.
“This year has been about growth and momentum, both beneficiaries of the slow but stable economic regime,” Koesterich said in a blog. “The unraveling of the ‘Trump trade’ has pushed investors back into those growth names, primarily tech, that can generate organic growth.”
“A slow but steady economy also means low economic and market volatility. This phenomenon has supported momentum,” he said. “In other words, the combination of slow growth and low volatility has favored segments of the market associated with a preference for risk, when in fact what investors really want are companies that can thrive in a slow-growth world.”
Look at the performance of growth and momentum—as represented by the Vanguard Growth ETF (VUG) and the iShares Edge MSCI USA Momentum Factor ETF (MTUM)—relative to other popular factors, as represented by the Vanguard Value ETF (VTV), the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the Vanguard High Dividend Yield ETF (VYM) in the chart below. (The iShares Edge MSCI USA Quality Factor ETF (QUAL) is up 11% year-to-date, also underperforming growth and momentum).
If capturing growth through an ETF is the goal, there are several big, liquid, well-established funds from large issuers like iShares, Vanguard, State Street and Schwab. These four firms dominate this segment with some 18 growth ETFs among them ranging in cost between 0.04% and 0.30%.
These are funds that have billions of dollars in assets—the biggest, the Vanguard Growth ETF (VUG), has $30 billion in AUM—attractive price tags, and they are all capturing new assets this year, at least six of them with net asset gains of more than $500 million.
There are a few growth ETFs from smaller providers such as First Trust, Guggenheim, PowerShares and Janus, but they all come with higher price tags.
Top Growth ETFs
Consider the top growth ETF asset gainers this year:
- Vanguard Growth ETF (VUG); net inflows of $1.68 billion year-to-date
VUG looks at six different growth metrics to capture the best growth among U.S. large- and midcap stocks. The portfolio, linked to a CRSP index, heavily tilts toward technology—at 33%, led by companies like Apple, Amazon, Facebook and Alphabet—and consumer discretionary stocks. It costs 0.06%.
- iShares S&P 500 Growth ETF (IVW); net inflows of $1.66 billion
IVW is one of the veterans in the space, coming to market in 2000. The fund picks stocks from the S&P 500 based on three growth metrics—sales growth, earnings growth and momentum. The portfolio also leads with technology and consumer discretionary, which together command some 51% of the weighting. The $20 billion fund trades on average $80 million a day. It carries an expense ratio of 0.18%.
- iShares Core S&P U.S. Growth ETF (IUSG); net inflows of $1.05 billion
IUSG searches for growth stocks among U.S. large-, mid- and small-caps, based on two growth metrics: growth forecasts and historical price/book. The $2.6 billion portfolio, with only a 0.05% expense ratio, allocates nearly a third of the mix to tech stocks.
- Vanguard Mid-Cap Growth ETF (VOT); net inflows of $655 million
VOT is a midcap fund that looks at several growth metrics in a portfolio that tilts toward larger, higher growth names. Industrials lead sector exposure at 22%, with technology a close second, at 21.5%. It’s one of the only growth ETFs among the most popular that’s not led by tech stocks. VOT has $5 billion in total assets.
- Schwab U.S. Large-Cap Growth ETF (SCHG); net inflows of $574 million
SCHG tracks a Dow Jones index that picks growth stocks based on six factors from 750 of the largest U.S. companies by market cap. The $4.5 billion fund is dirt cheap, at 0.04% in expense ratio. Technology and consumer discretionary dominate about 50% of the sector exposure.
- iShares S&P Mid-Cap 400 Growth ETF (IJK); net inflows of $510 million
IJK is another midcap fund that picks growth stocks from the S&P 400. The fund looks for stocks with high sales growth, high valuations and momentum. Launched in 2000, it has $6.9 billion in total assets, and a price tag somewhere in the middle, at a 0.25% expense ratio. Like VOT, IJK too allocates most heavily to industrials, at 23%, followed by financials, at 20%.
Momentum ETFs Different
In momentum, however, the segment seems to be heavily dominated by one ETF, the iShares Edge MSCI USA Momentum Factor ETF (MTUM), which has nearly $4 billion in assets, and has attracted nearly five times as many assets this year as the second-most-popular momentum ETF.
Other large issuers such as Vanguard and Schwab don’t really have a presence in momentum-specific investing. State Street has one fund, the SPDR S&P 1500 Momentum Tilt ETF (MMTM), which has only $21 million in total assets.
In this segment, it’s PowerShares that has the biggest number of momentum funds—16—offering sector- and region-specific portfolios focused on momentum. They are all smaller, and some of these funds have actually seen net outflows in 2017.
A look at the biggest asset gatherers in this segment this year show a precipitous disparity in net inflows already in the top three, as you can see below.
Top Momentum ETFs In Asset Flows
- iShares Edge MSCI USA Momentum Factor ETF (MTUM); net inflows of $1.4 billion
MTUM looks for stocks with steady price increases. The fund tracks an index of large- and midcap U.S. stocks selected and weighted based on price appreciation over six- and 12-month periods, and low volatility over the past three years. Nearly 60% of the portfolio is tied to technology and financials. The fund has an expense ratio of 0.15%.
- PowerShares S&P Emerging Markets Momentum Portfolio (EEMO); net inflows of $307 million
EEMO offers investors the opportunity to capture momentum in emerging market stocks, with a portfolio that looks at 12-month stock price performance minus the most recent month, adjusting for volatility. The fund has $370 million in total assets gathered in more than five years. Also technology and financials heavy, EEMO costs 0.29%.
- Pacer Trendpilot 750 ETF (PTLC); net inflows of $91 million
PTLC tracks an index that toggles between U.S. large-cap stocks and three-month T-bills based on momentum. According to FactSet data, when the environment is risk-on, PTLC offers access to U.S. large-caps with a bias toward midcaps. Technology and financials are the fund’s largest sector bets at a combined 40% of the mix. The ETF has $547 million in total assets gathered in about two years.
Charts courtesy of StockChart.com
For a complete list of single factor ETFs, look at our Smart-Beta ETF channel.
Contact Cinthia Murphy at [email protected]