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Momentum Unplugged

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Salt Financial

By Tony Barchetto, CFA

The biggest momentum ETF in the market just got a makeover as of November 30th - and not everyone may like its new haircut. iShares' BATS:MTUM is approximately $10 billion in size and tracks the MSCI USA Momentum Index, which targets large- and mid-cap stocks showing the strongest price momentum over both 6- and 12-month periods. [1] The index (and ETF) rebalances twice per year, most recently this past Friday, November 30th.

Momentum strategies suffered with the market decline in October and November, with MTUM (as a proxy) falling 8.6% from September 30th through November 30th. [2] But momentum has managed to hold on to its strong gains for the year, with MTUM again as a proxy posting a 6.3% total return through November 30th. [3] However, the rebalancing of MTUM on Friday has radically altered the characteristics of the fund, most obviously in its sector allocations.

The biggest changes are the sharp reduction in technology exposure (41.2% to 31.1%) and the more than doubling in health care (9.5% to 25.9%). However, some of this reduction in technology weighting is offset by a significant increase in communications services, which contains a good number of internet stocks that were formerly classified as technology. [5] Financials and industrials were also significantly reduced. Consumer staples - traditionally more defensive in nature - were increased from 2.7% to 8.1%.

A shuffling of sectors is expected in a strategy like this targeting trailing price action. But even more interesting is the dramatic shift in market sensitivity. Prior to rebalancing, MTUM was a more volatile strategy, chock full of high-fliers with higher betas than the market. As of Friday, the 100-day historical volatility for MTUM was 21.3% in comparison to 14.9% for the SPDR S&P 500 ETF (SPY). [4] Using our truBeta™ methodology

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Comments (2)

tbarchetto profile picture
Thanks for your comments, Gio. It's only been a couple of days, but the de-risking has helped so far--we'll see what 1H 2019 looks like with the new look. We don't offer any momentum strategies as there are others that do that really well, but we like it as style and watch it pretty closely. We focus on different ways to measure market risk and strategies that can take advantage of that.
Gio Graves profile picture
I for one welcome the reduced tech exposure. Those valuations need to come down in a rising rate environment. But surely the potential snapback rally will be missed.

No matter, just go back to 2015 to look at the mostly consumer discretionary allocation in the fund. And over time still went on to add tech winners and outperform the s&p.

Overall I wanted a fund with QQQ like returns, but willing to ramp up "value" names if growth goes through a prolonged period of underperformance. "Value" deserves quotes because frankly, low priced to book companies simply have not been earning their keep, so more than anything there is rationale why they underperform. So at a minimum as a sector rotation strategy ,MTUM is a keeper, though I do wonder in a more volatile environment if a quarterly rebalance would be better.
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