The idea of investing in an equity momentum ETF is, in theory, the idea of owning companies that have seen strong price gains in recent months and are likely to continue seeing price gains in the months ahead—at least in the near term.
Christ Brightman, CIO of Research Affiliates, best described momentum investing in a recent piece:
“Momentum investors are like the surfers we watch from beaches along the Pacific Coast. Both must catch a wave. Both attempt to ride it as it breaks. But the ability to glide away smoothly before being caught inside the inevitable crash(ing wave) that follows is what determines success.”
Brightman’s article offers great insight into why momentum exists and why it’s so difficult to capture it. It’s worth the read. A lot of the challenge centers on timing—how do you know exactly when a stock that went soaring higher will come crashing down?
Just like any other equity factor, momentum doesn’t always outperform the broad market. In fact, so far this year, momentum has, by and large, underperformed the S&P 500 Index.
A look at the top U.S. total-market momentum ETFs shows the disparity in total returns—momentum ETFs have underperformed anywhere from 0.2 to more than 3 percentage points this year, depending on the fund:
There aren’t that many momentum funds on the market today, and the selection looks particularly limited when you compare that with the 40-plus value ETFs and the many dividend yield strategies.
Still, momentum investing has been gaining popularity in recent years, particularly since iShares—the largest ETF issuer in the U.S., with more than $900 billion in U.S.-listed ETF assets—entered the segment with the launch of the iShares Edge MSCI USA Momentum Factor ETF (MTUM | A-68) in 2013.
The move in some ways opened up access to this factor to the ETF masses, and the fund quickly grew to become the biggest momentum ETF in the market, with $1.61 billion in assets today.
MTUM is neither the oldest momentum-focused fund nor is it the only. Here are the top U.S. total-market funds in this pocket of the investable universe, and how they differ from each other, starting with MTUM ...
The iShares Edge MSCI USA Momentum Factor ETF (MTUM | A-68); AUM: $1.6 billion
MTUM picks and weights stocks by looking at both six- and 12-month holding period returns, scaled by the volatility of returns over the past three years, according to the ETF.com database. The fund is designed to not only capture momentum, but to deliver a smooth ride in returns.
The risk here is that, in doing so, it offers a portfolio that can be concentrated in risk by owning fewer than 350 securities—it currently holds only 124 names—and often makes significant sector bets. Right now, MTUM is tilting toward consumer discretionary names, which represent about 18% of the mix. Health care and consumer staples follow at about 15% each.
So far this year, momentum may be underperforming the broad market, but MTUM is the best-performing momentum ETF, riding neck-and-neck with the SPDR S&P 500 (SPY | A-97).
MTUM costs 0.15% in expense ratio, and trades with an average spread of 0.04%, putting total cost of ownership at about $19 per $10,000 invested.
The PowerShares DWA Momentum Portfolio (PDP | B-67), the second-largest, with $1.38 billion in assets
PDP owns 100 stocks that are picked and weighted based on stock price performance—momentum. The fund is the veteran in the space, having come to market in 2007. And it’s also the second-largest ETF in this segment. But its performance so far this year is the worst among other U.S. total-market momentum ETFs—it’s delivered half the returns of SPY, as the chart below shows.
PDP is unique because it captures momentum through factors that “emphasize observable market behavior, rather than fundamental analysis,” according to the ETF.com database. The Dorsey Wright Technical Leaders Index that benchmarks PDP comprises about 100 companies selected from the Nasdaq-listed universe.
“PDP has a pronounced tilt to midcaps and makes real sector bets. As it says on the label, PDP fully embraces momentum, for better or worse,” FactSet research says of the fund. At the moment, industrials and consumer discretionary are the fund’s biggest sector tilts, at 22% and 21%, respectively.
From a cost perspective, PDP isn’t all that cheap. It costs 0.63% in expense ratio, and it trades with an average spread of 0.05%. Total cost of ownership for this fund taking into account trading costs is about $68 per $10,000 invested.
The SPDR S&P 1500 Momentum Tilt ETF (MMTM | B-87), only $18.6 million in assets gathered over four years
MMTM is a smart-beta play on the momentum factor, tracking a tiered index that weights securities from the S&P 1500 according to a combination of market capitalization and their price momentum over the previous 12 months.
The twist has yet to catch on with investors, as the fund remains small—less than $20 million in assets gathered since 2012.
MMTM is a broad portfolio, owning more than 1,300 holdings. The fund ranks the securities by trailing price performance—momentum—and assigns the biggest weighting to the best performers at the expense of the worst performers, according to ETF.com database.
Technology is the largest sector allocation, at 19%, followed by consumer discretionary, at 15%.
MMTM, which came to market in 2012, costs 0.12% in expense ratio and trades with a pretty wide spread, averaging 0.86%. Owning this fund costs investors nearly 1%, or $100 per $10,000 invested, once trading costs are taken into account.
The MomentumShares U.S. Quantitative Momentum ETF (QMOM | C-59), with $23.2 million gathered in only six months
QMOM is the newbie in the space, having launched in December 2015. By measure of assets under management, it’s been a pretty successful launch.
The fund is the only actively managed ETF in the U.S. total-market momentum universe. Still, as an active fund—meaning the portfolio manager can do as she pleases—QMOM employs a “systematic process” to select the stocks with the “highest quality momentum,” according to the ETF.com database. It’s active security selection with a repeatable process in place, if you will.
The fund, which relies on various momentum screens including seasonality and quality momentum, is a pretty concentrated play, with only about 50 holdings. That’s the smallest portfolio of all the ETFs in this segment.
Consumer discretionary is the biggest sector allocation at the moment, at about 17.5%. The fund costs 0.79% in expense ratio, and trades with an average spread of 0.22%, putting total cost of ownership at about $101 per $10,000 invested—more expensive than passive ETFs, but it’s competitively priced relative to comparable active mutual funds.
So far this year, QMOM too has underperformed the S&P 500, but it’s not at the bottom of the pack.
Charts courtesy of StockCharts.com
Contact Cinthia Murphy at email@example.com.