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IShares Edge MSCI USA Momentum Focuses on Performance

Alex Bryan, CFA

Alex Bryan: IShares Edge MSCI USA Momentum Factor ETF MTUM is an effective strategy that should beat the market over the long term. It targets stocks with strong recent risk-adjusted performance, based on the idea that recent performance tends to persist in the short term. This effect has been observed in most markets studied. It may arise because investors may underreact to new information, causing stock prices to move more slowly than they should. Once a trend is established, investors may pile into recent winners, pushing their prices up further. 

While momentum looks good on paper, it requires high turnover, which can create high transaction costs. This fund mitigates those costs by rebalancing only twice a year and applying buffer rules to mitigate unnecessary turnover. These steps slightly dilute the portfolio’s exposure to the strongest-momentum stocks, but they should help performance by reducing costs.  

The fund’s focus on risk-adjusted performance also helps by reducing exposure to the most-volatile momentum stocks, which tend to struggle when the market volatility picks up. To further address the negative impact of market volatility, the fund's benchmark rebalances in between the scheduled rebalancing dates if market volatility significantly increases. When this rebalancing is retriggered, the index focuses on more-recent momentum to construct its portfolio. This adjustment should help the fund during periods of high market volatility.

This is a good strategy to pair with a value or low-volatility fund, because momentum tends to work well when those investment styles don’t, and vice versa.

This strategy has established a strong record, beating the MSCI USA index by 2.4% from its inception in April 2013 through April 2019. Its low 15-basis-points expense ratio and focus on risk-adjusted performance give it a good chance to continue to deliver market-beating performance over the long term.