As readers well know, I am a fan of passively-managed exchange-traded funds (ETFs). The structure provides diversified exposure to baskets of investments according to a rule-based approach. Carefully selected combinations of these broad asset groupings help provide a broadly diversified portfolio of investments targeted to a specific risk and return profile.
In a year like 2020, where the dispersion of returns from winners and losers has been very wide, it would be nice to have one strategy that has only big winners! Such an ETF that narrows in on this goal is the iShares MSCI USA Momentum Factor ETF (MTUM).
MTUM is a factor-type investment focused on large- and mid-cap US equities that show relatively higher momentum characteristics. Momentum is broadly defined as a calculation of “excess return” compared to other equities in its universe. So, this ETF simply buys stocks that have recently outperformed other stocks, rebalanced semiannually. And, who wouldn’t want to buy investments that have performed well? This is part of the behavioral bias on why academics show that the momentum factor over time outperforms investments that don’t exhibit positive momentum.
Examining the top 10 holdings of MTUM is instructive. Per the chart below, MTUM’s top 10 holdings skyrocketed compared to MTUM itself (up 25% YTD, the bold black line towards the bottom) and the S&P 500 (up 11% YTD, the dark blue line just below it). Obviously, the new household names like Apple, Amazon, and Microsoft lead the pack and each have huge gains of more than 40% on a YTD basis
But, the real story is MTUM’s top holding: Tesla (that I left off the chart because its gains have been so phenomenal). Tesla’s gains have gone through the roof year-to-date, up an amazing +470%. MTUM was a good way to own Tesla, without making any kind of valuation decision - purely a momentum play!
So, the momentum factor and MTUM did its job this year; find the investments that produced excess return and hold them for at least 6-months until the next rebalance cycle. No guarantees on how this will shape up over the next six months, but long term holders have garnered plenty of excess return to cushion any drawdown.