3 ETF Strategists On ‘Momentum’ Pullback

April 11, 2014

How should investors think about the beating momentum stocks are taking?

ETF.com asked three of its contributing ETF strategists to speak about the recent pullback in global stock markets and, specifically, how to think of the decline of momentum stocks.

As an example, the iShares MSCI USA Momentum Factor (MTUM | A-59) has fallen almost 8 percent in the past month and 4 percent in the past week. By comparison, the SPDR S&P 500 ETF (SPY | A-98) has fallen 2.5 percent in the past month and just shy of 3 percent in the past week.

So, is this pullback telling us something bearish we should heed or, conversely, pointing to a replenishment of expected returns in this realm that points to building positions rather than trimming them?

Tyler Mordy, president and co-chief investment strategist of Toronto-based Hahn Investment Stewards

Ultimately, markets are priced on both expectations and reality. The two cannot diverge for long. In the case of momentum plays, expectations may be ahead of reality.

Investors are “front running” the economic cycle—rotating into momentum stocks, cyclicals, high beta, etc.—on the expectation that the U.S. is entering a self-sustaining recovery led by the private sector. That is not yet guaranteed. And there’s a big risk factor in the form of Fed tapering. The bullish momentum case rests on the assumption that this policy normalization represents a healthy development and confirms a recovery.

The less sanguine view is that tapering is a de facto monetary tightening and thus represents head winds to more momentumlike plays.

This tug of war will continue, but investors should hedge against the latter view. Globally diversified portfolios remain the best defense.

Yes, we will tactically own risk-factor tilts occasionally, but not as core holdings. Generally, we prefer our beta pure—and our beer cold!

Scott Kubie, chief investment strategist of Omaha, Neb.-based CLS Investments

The momentum factor is prone to sharp pullbacks because investor sentiment shifts disproportionately to changes in the stories behind securities and industries with superior momentum. There is no question momentum can become overvalued at times, but these pullbacks are normal whether momentum is cheap or dear.

Based on its performance so far and where we are in the cycle, we continue to stay invested in a factor we think will benefit investors over the long run.

Investors using a momentum ETF should pay extra attention to their sector exposure. Currently, the iShares MSCI USA Momentum Factor (MTUM | A-59) is overweight health care and consumer discretionary. If those sectors are less attractive, you may want to supplement your portfolio with some targeted sector exposure in combination with MTUM.


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