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ETF Specialist

Cost-Efficient Exposure to Momentum

This low-cost ETF may offer attractive returns and good diversification benefits.

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In many cases, extrapolating past performance into the future is a bad idea. In fact, securities that have outperformed for several years tend to become more expensive and priced to offer lower returns going forward. But in the short run, recent performance trends tend to persist. Winners over the past six to 12 months tend to continue to outperform for the next several months, while those that have underperformed often continue to lag. This phenomenon is known as momentum. It has been observed in nearly every market studied and across different asset classes over long periods. Investors can get efficient exposure to stocks with positive momentum through  iShares MSCI USA Momentum Factor (MTUM) for a low 0.15% expense ratio.  

This fund tracks an MSCI index that targets large- and mid-cap stocks with strong risk-adjusted price momentum, which differentiates it from traditional momentum strategies studied in the academic literature. This focus on risk-adjusted performance may help moderate the fund's risk profile and reduce turnover. Volatility in a stock influences price movements, but this component of returns may not last. Risk-adjusted momentum gives a better signal of directional price movements, which may be more likely to persist.

Alex Bryan has a position in the following securities mentioned above: MTUM. Find out about Morningstar’s editorial policies.