Smart beta ETF strategies that track alternative or customized indices have been gaining traction, reflecting the various dynamics of different markets in varying conditions.
“I think it’s been an interesting year for smart beta,” Dave Nadig, Managing Director of ETF.com, said at the Morningstar Investment Conference.
“To me, what the big interest story was seeing what happened with the min-vol funds and the momentum funds… the charts started looking like they were printed right over each other, and I think that’s an important lesson for investors looking at smart beta: sometimes it’s not what you think,” he added.
For example, the iShares Edge MSCI Minimum Volatility USA ETF (USMV A) and iShares MSCI USA Momentum Factor ETF (MTUM A-), which tend to stand on opposite ends of the investment style spectrum, have both increased a little over 18% year-to-date, moving in relative lockstep.
USMV tries to reflect the performance of the MSCI USA Minimum Volatility (USD) Index, which measures the performance of large and mid-capitalization equity securities listed on stock exchanges in the U.S. that, in the aggregate, have lower volatility relative to the broader U.S. equity market. The defensive low-volatility strategy has gained attention in the current market mired with trade and liquidity concerns, easing profit growth and economic woes, with volatility recently spiking in response to another round of trade fears.
Meanwhile, MTUM tries to reflect the performance of the MSCI USA Momentum Index, which includes U.S. large- and mid-capitalization stocks exhibiting relatively higher momentum characteristics. Momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that “the trend is your friend” and that stock market leaders typically continue to outperform. This type of strategy can be an effective way for targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
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