$9B Momentum ETF Is Unrecognizable After Makeover

A dramatic makeover has made the iShares MSCI USA Momentum Factor ETF (MTUM) unrecognizable compared to what it was a little over a week ago.  

Following its rebalancing at the end of May, only three of the top 10 holdings for MTUM on March 31 remain in the top 10 today.   
   
The reshuffling of the holdings within the $9 billion exchange-traded fund gives it a completely new look and raises the question of whether the ETF is too late to the party. 

Momentum Investing  

MTUM is the largest U.S.-listed ETF targeting the momentum factor. It tracks the MSCI USA Momentum SR Variant Index, which is composed of U.S. large and midcap stocks “exhibiting relatively higher price momentum.”   
   
The thesis behind investing in momentum stocks is that stocks that have performed well recently will continue to perform well in the near term. 

According to academic literature cited by MSCI, stocks with “high price performance in the recent history, up to 12-months … tend to continue their high price performance over the near term, typically over a 6-12 month period.”   
   
To that end, to create its momentum index, MSCI looks at all the stocks within the broader MSCI USA Index and then comes up with a momentum score for each stock. It then uses that score—which is essentially price performance over the past six and 12 months adjusted for volatility—to decide which stocks to include in the momentum index.   
   
Around 30% of the stocks within the parent index are included in the momentum index, and weights are determined based on a combination of the momentum score and market cap.  

Underperformance  

The thesis behind investing in the momentum factor is rooted in academic literature, but like anything in the markets, past performance in no guarantee of future results.  

This year, MTUM is sharply underperforming the broader market, with a 4.9% loss versus a 12.4% gain for the iShares Core S&P 500 ETF (IVV).  

Last year, both ETFs fell by an identical amount—just over 18%—while in 2021, MTUM underperformed, with a 13.4% increase versus 28.8% for IVV. 

MTUM’s struggles in recent years are a reflection of the jarring shifts in the market’s preferences that we’ve seen over that period. After favoring growth over everything in 2020 and 2021, investors began to seek out profits and modest valuations in 2022. 

Then this year, preferences have changed again, with growth back in favor thanks in large part to the fervor over artificial intelligence.  

Sharply shifting preferences make things more difficult for a momentum ETF like MTUM, as the fund is at risk of buying stocks when they’re high and selling when they’re low. 

A Tech-Heavy ETF 

That’s why MTUM’s latest rebalancing, in which the ETF’s portfolio has tilted heavily toward technology stocks, raises some eyebrows.  

As you can see from the table below, MTUM’s portfolio today looks nothing like it did in March.

The high-flying trio of Nvidia, Meta and Microsoft make up 15% of the portfolio today, whereas they weren’t in the fund at all prior to this latest rebalancing.  

In the five months leading up to MTUM’s purchase of the stocks, each had already risen by more than 38% (NVDA +164%; META +112%; MSFT +38%). 

That’s not to say they can’t go higher; the whole thesis behind momentum investing is that they can. But the ETF is also susceptible to another sudden shift in the market’s preferences.  

Down, But Not Out  

Investors have noticed the struggles of MTUM. Since the start of the year, they’ve pulled $2.4 billion out of the fund, the 11th-largest outflows of any U.S.-listed ETF. 

But despite its recent underperformance, MTUM isn’t dead. It’s still a $9 billion ETF, and at some point, market trends may prove to be more durable than they’ve been since 2020. 

A longer period of outperformance, particularly for the tech stocks that dominate MTUM today, would be a boon for the fund.  

In fact, since its inception on April 16, 2013, MTUM was beating the SPDR S&P 500 ETF Trust (SPY) for much of that period. At its peak in November 2021, the fund had returned a cumulative 320% versus 250% for SPY. 

But since then, it’s lost all of that outperformance and more. Today it has a launch-to-date return of 208% versus 228% for SPY. 

It goes to show how quickly momentum can shift and how a few poorly timed rebalancings can weigh on a momentum strategy’s returns.  

Contact Sumit Roy at [email protected]