“Don’t fight the tape!” and “The trend is you friend!” are well-known idioms that persist in the financial world. The idea that a stock price will keep going up since it has been going up has been around for a while. And it seems logical, too! Who wouldn’t want to buy a stock that has been doing well? Have you ever heard someone ask about buying a stock that has performed poorly?
This phenomenon is specifically termed momentum and bucketed in the financial lexicon as a factor. Academic studies into it have shown it to be a broad factor that encompasses other factors and it has a history of driving investment returns. As the theory goes, the momentum factor serves as a diversifier and has the potential to add extra return to a portfolio.
A well-diversified passive portfolio, over the long term, will produce returns that mimic the broad indices. This is not necessarily a bad thing since active management has been shown to underperform a passive approach over time (check out the S&P Indices versus Active, SPIVA®, papers here for more info). Consequently, it pays to seek out low-cost passive additions to a portfolio to potentially push performance ahead of the broad indices.
Over the recent time horizon, the momentum factor has put in good performance helping it achieve that goal. Let’s take a look at the recent performance.
The iShares MSCI USA Momentum Factor (MTUM) exchange-traded fund (ETF) is one of the largest passive ETFs that follows a momentum investing strategy with assets under management of $17.2 billion. It is low-cost (0.15% expense ratio) and follows a rules-based approach to investing. It mechanistically rebalances twice per year (May and November), swapping out stocks that lag in momentum for stocks that have gathered momentum.
As deduced from the chart below, over the last 3.9 years from January 1, 2018 through November 9, 2021, the MTUM ETF (the orange line, mostly on the top) has generated an annualized total return of 18.26% compared to the S&P 500 (IVV, the blue line) of 17.47%. The MTUM ETF showed some significant outperformance during the latter half of 2020, but gave back some of it during the beginning of 2021 before rallying again recently.
Dattilio & Ash Capital Management strives to achieve investment results to help its clients achieve their goals. We continually monitor the capital markets for investment instruments and strategies that help us do that.