The FAANG stocks, among others, make for easy culprits behind the recent slide in momentum stocks and the related exchange traded funds.
It may be overly simplistic, but a key element of momentum investing is that it works until doesn't. FAANG and other momentum fare worked for a while, but the good times were interrupted last month, pressuring some well-known ETFs in the process.
Different momentum strategies apply the factor in varying ways. The popular iShares Edge MSCI USA Momentum Factor ETF (CBOE: MTUM) is mostly a price momentum strategy while the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV) is rooted in relative strength.
As is the case with many basic growth and momentum ETFs, MTUM is heavily allocated to the technology and consumer discretionary sectors. Even with the recent deterioration in those groups, those two sectors combine for over 56 percent of MTUM's weight.
"Within the tech sector, the relative strength for three of MTUM’s largest sub-industries (data processing & outsourced services and semiconductors in the technology sector and aerospace & defense in the industrials sector) has weakened in recent months,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a Tuesday note.
Why It's Important
How funds arrive at momentum matters for investors' outcomes. For 90 days ending Nov. 26, MTUM was down 11.1 percent. That's obviously bad, but not nearly as bad as the 14.3 percent shed over the same period by FV.
FV holds five other First Trust ETFs displaying positive relative strength traits, but the ETF's FAANG and technology exposure is massive as a technology sector fund, a Nasdaq-100 Index ETF and the First Trust Dow Jones Internet Index Fund (NYSE: FDN) combine for about 60 percent of FV's roster.
“Despite the more frequent rebalance than MTUM, FV’s 4.7 percent loss year-to-date through November 24 was much wider than fractional gain for the iShares offering,” said Rosenbluth. “This highlights that not all smart-beta ETFs in a style will perform in sync with one another.”
FV has also been stymied by retrenchment in biotech stocks because its other two holdings are a biotech fund and healthcare ETF with some biotech exposure.
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