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Finding Momentum With Momentum ETFs

ETF Professor

With equity markets rewarding risk-taking this year, it is not surprising that some of the best-performing factor-based exchange-traded funds offer investors exposure to growth and momentum stocks.

The iShares Edge MSCI USA Momentum Factor ETF (BATS: MTUM), the largest momentum-based ETF, is up more than 29 percent year-to-date. At the core of the momentum strategy is the notion that stocks that are already appreciating in noteworthy fashion can continue doing so. Momentum is working this year as it is the best-performing individual investment factory, topping the likes of low volatility and value, among others.

The $4.1 billion holds 123 large- and mid-cap stocks fitting the momentum designation, but there are other momentum ETFs to consider as well.

Evaluating The Momentum Factor

“We believe this positioning was appropriate since the MSCI USA Momentum index rose 8 percent during the third quarter, ahead of the broader MSCI USA index's 4.5 percent, like many other factors MSCI tracks,” said CFRA Research director of ETF and mutual fund research Todd Rosenbluth in a note out Monday. “Looking back to the beginning of the year, the MSCI USA Momentum factor index rose 27.5 percent through September, nearly double the gain for its parent MSCI USA index and ahead of the returns for its Enhanced Value (12.4 percent), Minimum Volatility (13.1 percent), and Quality (15.7 percent).”

Many investors may assume that momentum-based strategies are overweight technology stocks and that is the case with MTUM as the ETF devotes over a third of its weight to that sector. Financial services and consumer discretionary names combine for over 38 percent of MTUM's weight.

A Rival

One of MTUM's rivals is the PowerShares S&P 500 Momentum Portfolio (NYSE: SPMO), which turned two years old on Monday. SPMO tracks the S&P 500 Momentum Index.

Relative to MTUM, “SPMO has a larger weighting in technology (39 percent) and financials (35 percent), but smaller exposure in health care (5 percent). Both ETFs have no exposure to the consumer staples or energy sectors,” said Rosenbluth.

SPMO is up 18 percent this year and hit an all-time high on Monday. The ETF allocates almost 19 percent of its combined weight to Microsoft Corporation (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL).

CFRA has Overweight ratings on MTUM and SPMO.

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