Here we go! The “re-opening” economy seems to be getting into high gear! Some mega cap tech stock darlings from last year are lagging this year while traditional brick-and-mortar plays are leading the pack. Nowhere is that more fully seen than in the dramatic shift in the holdings of the iShares Momentum ETF (MTUM)!
As you may recall from my previous blog post last September (OMG, MTUM!, https://www.dattilioash.com/our-blog/2020/9/2/omg-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.
The MTUM ETF turned in phenomenal performance in 2020 with a +29.85% total return compared to the S&P 500 return of +18.4%. So far in 2021, however, it has lagged the S&P 500’s YTD return of +12.7% with its mediocre +5.70% return; ostensibly since MTUM’s holdings have not yet been rebalanced to reflect the transition of the equity market leadership to the re-opening economy. During MTUM’s semiannual rebalance cycle that just ended, we can see some dramatic shifts in holdings to boot holdings that have lagged the market and insert holdings leading the re-opening rally.
Kicked out are household tech names like Apple, Microsoft, and Amazon replaced with other household names like JP Morgan, Berkshire Hathaway, Disney, and Bank of America; totaling an 18.5% shift in portfolio allocation worth $2.7 billion (see chart below for chart of relative performance of the leaders compared to S&P 500 (IVV))! Sticking around during this rebalance cycle are stocks like Tesla, Paypal, and Alphabet.
The trouble with a strategy like this, of course, is that it depends mostly on the stocks with positive momentum continuing their upward trend; generally considered the major weakness seen in momentum strategies. A reversal in the current leadership would result in a “whipsaw” effect of “buying high and selling low”, not a good thing. Long term commitment to strategies like this, however, have been shown to outperform despite the risks.