A New Factor ETF With Plenty of Momentum

ETF Trends

The iShares MSCI USA Momentum Factor ETF (MTUM) is off to an impressive. MTUM, which was part of a three-ETF suite rolled out by the world’s largest ETF issuer in mid-April, is a passively managed, factor-based fund that uses an “intelligent beta” approach to generating returns.

The three iShares factor ETFs were developed at the request of the Arizona State Retirement System, which seeded $100 million to each of the three funds. Starting with $100 million in assets is an advantage for any new ETF because that is the watermark so many observers, right or wrong, use to judge an ETF’s validity. Still, MTUM has attracted over $61 million in assets since its debut. [JNJ), Gilead Sciences (GILD), Verizon (VZ), Walt Disney (DIS) and Celgene (CELG). Importantly, MTUM offers a new way of approaching old views on momentum investing. [Factor ETFs off to Fast Starts]

Momentum is usually measured by price returns over the trailing 12-month period, excluding the most recent month. However, the MSCI USA Momentum Index, MTUM’s underlying index, uses a different approach.

“The six-month signal is calculated by using months two to seven, the 12-month signal uses months two to 13. The returns are divided by the annualized standard deviation of the stock’s trailing three-year returns. Then they’re converted to z-scores, a standard method for normalizing data into a ‘bell curve’ distribution. The z-scores of the six-and 12-month signals are averaged to produce a final momentum score, which is multiplied by the stock’s market cap to come up with a final weight,” according to Samuel Lee, ETF Analyst at Morningstar.

At the sector level, groups meeting MTUM’s momentum requirements include health care, consumer staples and consumer discretionary. That trio combine for nearly 70 of MTUM’s sector weight.  MTUM’s smallest sector weights are to utilities, materials, energy and industrial names, a group that combine for less than 10% of the ETF’s weight. The ETF charges a scant 0.15% per year.

“From the index’s hypothetical start in May 1994 to the end of April 2013, it beat the MSCI USA Index by 3.45 percentage points annualized. This is too good to be true. I highly doubt the strategy will produce such excellent results in the future. However, given the weight of the evidence, I think the odds favor MTUM earning some momentum premium in the future,” wrote Lee.

iShares MSCI USA Momentum Factor ETF

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