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Top Momentum ETF Getting Energy Boost?

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·6 min read
In this article:
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  • QUAL
  • SIZE
  • VLUE

Key Takeaways

Fundamental Context

Demand for a momentum-based strategy has continued in 2021. iShares offers four U.S.-focused factor ETFs positioned to potentially generate stronger returns than the broader market. In 2020, MTUM was the third most popular, behind the iShares MSCI USA Value Factor ETF (VLUE) and the iShares MSCI USA Quality Factor ETF (QUAL).

Year-to-date through Oct. 29, MTUM gathered $1.3 billion of additional ETF flows, according to CFRA data, second behind only VLUE’s $4.2 billion cash haul, while QUAL and the iShares MSCI USA Size Factor ETF (SIZE) incurred outflows. A rotation between factors is normal, reflecting economic outlook and shifting risk tolerance.

Figure 1: Demand For iShares US Factor ETFs ($B)

Pop-up Image
Pop-up Image

Source: CFRA ETF Database. As of October 29, 2021.

(For a larger view, click on the image above)

MTUM last rebalanced in May, with a significant increase in financials and a sizable decrease in information technology and consumer discretionary stocks. The $17 billion smart beta ETF climbed 33% in the 12 months ended Oct. 29 but lagged the 41% return for the S&P 500 Index.

The ETF is now heavily weighted to financials (31% of assets, up from 1.5% at the end of April), with information technology (currently 17% vs. 42% six months ago), consumer discretionary (14%, down from 20%) and industrials (13%, up from 7.6%) the next largest. Meanwhile, MTUM had just 2.1% and 0.4% of respective assets in the energy and real estate sectors.

Figure 2: Sector Breakdown Of MTUM (% of assets)

Sector Breakdown
Sector Breakdown

Source: CFRA ETF Database. As of October 29, 2021.

(For a larger view, click on the image above)

Unlike other U.S. factor ETFs offered by iShares, there are no sector constraints for MTUM, which allows the ETF to semiannually adjust based on where the momentum is strongest. CFRA expects this exposure to shift when MTUM is reconstituted in late November. Since May, the energy, information technology and real estate sectors have demonstrated relative strength compared to consumer discretionary and industrials sectors.

Figure 3: Select Sector Relative Strength

Select Sector
Select Sector

Source: CFRA. Review of S&P 1500 GICS sector performance in the 12-month period ended October 29, 2021. Scored 1 through 5.

(For a larger view, click on the image above)

MTUM focuses on stock-specific six- and 12-month performance records. The MSCI index is constructed in part using price performance data one month prior to the rebalancing date, with the security weightings based on a combination of a momentum score and the market capitalization weight of the stock within the parent MSCI USA Index.

The heftiest positions in the ETF are large cap stocks that previously demonstrated relative strength, but the ETF holds approximately 125 total securities, some within the midcap sphere. High turnover is to be expected, even as the benchmark provider uses buffer rules to limit the number of semiannual changes.

Possible Component Changes

In Figure 4, we review the top 10 ETF holdings and whether they are at risk of being dropped. While we are not attempting to calculate the future weightings of MTUM, a review of its recent history can offer some clues to what it will look like after the reconstitution.

BRK.B, DIS, and PYPL are at risk of being removed and replaced with stronger performers. Those three companies are all current top 10 holdings for MTUM that rose less than 50% in the past year, with PayPal the weakest of the bunch. This is in contrast to Bank of America (BAC), Tesla (TSLA) and Wells Fargo (WFC), each of which more than doubled in value, continuing their strong momentum.

We think fellow top 10 holdings Alphabet (GOOG) (GOOG.L), Applied Materials (AMAT) and J.P. Morgan (JPM) are also likely to remain in the portfolio. However, we expect TSLA’s 8.4% stake to be trimmed when the fund is rebalanced. Meanwhile, Caterpillar (CAT) and Deere (DE)—which are just outside of the top 10—have struggled, and we think such performance challenges could result in their removal from the ETF.

Figure 4: MTUM’s Recent Top 10 Company Holdings

Ticker

Sector

Weighting (%)

Status

TSLA

Consumer Discretionary

8.4

Secure

JPM

Financials

4.5

Secure

BAC

Financials

4.4

Secure

BRK.B

Financials

4.1

At Risk

DIS

Communications Services

3.9

At Risk

WFC

Financials

3.1

Secure

PYPL

Information Technology

2.9

At Risk

GOOG

Communications Services

2.9

Secure

AMAT

Information Technology

2.7

Secure

GOOG.L

Communications Services

2.7

Secure

Total

39.6

Energy and real estate stocks should be added to the fund soon. Energy stocks have soared recently as oil prices have climbed higher and investors gained confidence in the macroeconomy in 2021. COP, SLB and XOM are just a few examples of large cap stocks in the energy sector that have more than doubled in value in the past 12 months, positioning themselves for possible inclusion into the momentum ETF to join existing stakes in Devon Energy (DVN) and EOG Resources (EOG).

Meanwhile, CBRE Group (CBRE) is currently the lone real estate sector constituent in the MTUM, but retail REITs Kimco Realty (KIM), Regency Centers (REG) and SPG could be included based on their relative strength.

PYPL could be replaced by fellow tech stock NVIDIA (NVDA). The semiconductor company is among the companies with the heftiest market capitalizations not currently owned by MTUM but that have climbed in value in 2021. While MTUM is not mandated to own a certain percentage of assets in information technology stocks, NVDA, Enphase Energy (ENPH) and Gartner Group (IT) would fit in well with existing stakes in AMAT and Fortinet (FTNT).

CFRA’s ETF ratings combine fund-specific metrics with holdings-level analysis. Our five-star rating on MTUM is driven by the strong reward potential and risk mitigation of the current—not the future—portfolio. Some of the potential replacements we identified are attractive based on CFRA’s qualitative and quantitative assessments, while others are less appealing. We will review the full portfolio following MTUM’s end-of-November reconstitution.

Figure 5: Potential Additions To MTUM

Ticker

Sector

Market Cap ($B)

12-Month Return (%)

NVDA

Information Technology

638

97

XOM

Energy

273

110

COP

Energy

100

164

SPG

Real Estate

48

143

SLB

Energy

45

127

MPC

Energy

42

139

IT

Information Technology

28

181

ENPH

Information Technology

31

126

KIM

Real Estate

14

125

REG

Real Estate

12

107

Conclusion

Smart beta ETFs—such as MTUM—are not static, and are periodically reconstituted and rebalanced to reflect changes in fundamentals or stock price movements. Therefore, a holdings-based approach like what we use at CFRA in our star ratings makes sense for conducting analysis. The securities inside MTUM today are likely to change in a few weeks.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

Copyright © 2021 CFRA. All rights reserved. All trademarks mentioned herein belong to their respective owners.

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