MOMENTUM’S 5 YEAR RUN NEEDS A WASH OUT

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I looked at the performance of the iShares US Momentum ETF (MTUM) vs the iShares US Value ETF (VLUE).  These two ETFs are smart beta plays on traditional Fama-French factors.  These factors have been shown to outperform the market over time.  That is to say, that holding a portfolio of value stocks or a portfolio of momentum stocks tended to outperform an market cap weighted index over time.

What is amazing is that over the past 5 years, MTUM has outperformed VLUE by 45%.  Even in the recent sell off, MTUM, performed much better than VLUE.  I would think at this point in the cycle, Momentum stocks in this ETF like JPM, AAPL, MSFT, BA, NVDA must be stretched to some degree.  VLUE’s top five names are AAPL, CSCO, INTC, GM, and PFE.

The P/E of the MTUM holdings is around 29 according to Bloomberg, while the P/E of VLUE is 18.9.

Many of the quant hedge funds out there try to trade these factors with trend following.  This means they try to get long the factor that is working and short the factor that isn’t working.  So, from that view, no doubt the market’s weaker hands are short the value factor and long the momentum factor.  I’m not certain that the volatility from the past few weeks is over, but I would feel a lot better if some of the Momentum trades got a serious wash out before I would want to add a lot of risk to portfolios.

 

Source: Bloomberg

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