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iShares Files for Momentum-Based ETF

Eric Dutram

iShares, the world’s biggest provider of ETFs, is once again stuffing a number of products into the pipeline. Just the other day, the company announced plans for value and risk focused funds that target the U.S. market.

However, this doesn’t appear to be the end of iShares’ plans as the company has just put out another filing on to the market. This latest SEC filing also targets the American market, but it looks to have a momentum focus instead (see iShares Files for Risk and Value Weighted ETFs).

While a great deal of the key information was not made available in the initial filing, there was some data released on the index and how it looks to apply a momentum-based methodology to the U.S. market. Below, we have highlighted some of these key details on this in-registration product for investors curious as to what iShares might be up to next for its fund lineup:

Proposed Methodology

The proposed ETF looks to track the MSCI USA Momentum Index in order to find top stocks that have strong momentum characteristics. The focus is on price momentum over the previous six months to one year period, utilizing daily returns to compute the figure.

Results are then standardized at +/- 3 standard deviations and the z-scores are translated into momentum scores. Once this has been accomplished, the top 100-150 stocks are chosen for inclusion in the underlying index (read Who Says iShares ETFs Aren’t Cheap?).

Investors should also note that weighting isn’t purely market cap-based but instead uses it as part of the weighting process. The index takes the momentum score and multiplies it by the free-float market cap in order to tilt towards high momentum stocks in excess of their cap weighting.

The index looks to edge towards higher beta sectors, and away from those with low beta like utilities and staples. Instead, the fund looks to have a bias towards consumer discretionary, financials, and tech companies.

ETF Competition

With the departure of Russell from the passively managed ETF world, the number of momentum focused ETFs was greatly curtailed. However, there are still a few ETFs out there that utilize momentum strategies for investors, any of which could pose as foes for iShares’ in-registration product (see 4 Best ETF Strategies for 2013).

The most popular of the bunch is the SPDR S&P 1500 Momentum Tilt ETF (MMTMF) which is a low cost product targeting large and mid cap stocks. The fund costs just 35 basis points a year in fees but has under $9 million in AUM so it isn’t exactly well-known by investors.

Beyond that is QuantShares’ US Market Neutral Momentum Fund (MOM) which is a bit more expensive at 99 basis points a year. However, the product is arguably a more momentum-intensive fund, as it goes long in high momentum stocks, and short in low momentum stocks to get its exposure (see Invest Like Morgan Stanley with These 5 Commodity ETFs).

These two are among the biggest momentum-focused ETFs currently on the market, so there clearly hasn’t been much appetite for the space as of now. This could change if iShares can successfully bring its new concept to market though, so investors will have to wait and see if the San Francisco-based firm can break the trend and accumulate a decent amount of assets in this underappreciated corner of the market.

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