Single Factor Focus: Ranking The Top ‘Momentum’ ETFs

August 02, 2016

The idea of investing in an equity momentum ETF is, in theory, the idea of owning companies that have seen strong price gains in recent months and are likely to continue seeing price gains in the months ahead—at least in the near term.

Chris Brightman, CIO of Research Affiliates, best described momentum investing in a recent piece:

“Momentum investors are like the surfers we watch from beaches along the Pacific Coast. Both must catch a wave. Both attempt to ride it as it breaks. But the ability to glide away smoothly before being caught inside the inevitable crash(ing wave) that follows is what determines success.”

Brightman’s article offers great insight into why momentum exists and why it’s so difficult to capture it. It’s worth the read. A lot of the challenge centers on timing—how do you know exactly when a stock that went soaring higher will come crashing down?

Just like any other equity factor, momentum doesn’t always outperform the broad market. In fact, so far this year, momentum has, by and large, underperformed the S&P 500 Index.

A look at the top U.S. total-market momentum ETFs shows the disparity in total returns—momentum ETFs have underperformed anywhere from 0.2 to more than 3 percentage points this year, depending on the fund:

There aren’t that many momentum funds on the market today, and the selection looks particularly limited when you compare that with the 40-plus value ETFs and the many dividend yield strategies.

Still, momentum investing has been gaining popularity in recent years, particularly since iShares—the largest ETF issuer in the U.S., with more than $900 billion in U.S.-listed ETF assets—entered the segment with the launch of the iShares Edge MSCI USA Momentum Factor ETF (MTUM | A-68) in 2013.

The move in some ways opened up access to this factor to the ETF masses, and the fund quickly grew to become the biggest momentum ETF in the market, with $1.61 billion in assets today.

MTUM is neither the oldest momentum-focused fund nor is it the only. Here are the top U.S. total-market funds in this pocket of the investable universe, and how they differ from each other, starting with MTUM ...


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