# Momentum factor and MTUM



## james4beach (Nov 15, 2012)

Although it's a huge ($10 billion) and well performing fund, only Pluto has mentioned it so far and it's never had any discussion on this forum.

iShares Edge MSCI USA Momentum Factor ETF
Morningstar page on MTUM

MTUM seeks large cap US stocks with high price momentum. They screen for stocks by looking at recent performance adjusted for volatility. This gets the highest performers that have steady price gains, but avoids extremely volatile stocks that happen to be up a lot (such as pharma stocks). In the end, what you get is a portfolio of stocks that have been performing very strongly -- momentum, or chasing high-performing stocks.

5 year performance is 18.9% CAGR versus 14.5% CAGR for the S&P 500 with pretty consistent outperformance. Expense ratio is a very reasonable 0.15%.

Potential problems I see are heavy sector concentration and the big question of what happens in a bear market when popular stocks suddenly become unpopular. Currently MTUM is 42% technology which is quite high. (Then again, the TSX Composite is almost as high in financials).

In particular, I'd like to see how it handles the situation when technology starts underperforming and becomes a performance drag, rather than a boost. Will MTUM then underperform? There's no way to know until it happens.

I think it's an interesting idea. In my view, stock markets are not rational anyway, and piling into popular stocks is quite intrinsic to stock investment. For example, note how many of us around here own RY & CNR. Or how Canadian investors overall tend to overweight financials, due to chasing returns/momentum (often without realizing it). Why not embrace the momentum and return chasing, but have it done more mechanically and professionally?

Any thoughts?


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## james4beach (Nov 15, 2012)

Maybe I should add, since MTUM favours low volatility stocks, there is a bit of a similarity to Canada's ZLB which has also been a strong performer.


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## Pluto (Sep 12, 2013)

There is also another similiar one. FFTY constituted by the IBD 50, I believe. My thoughts are to consider these during a poor market - correcttion or bear market - to get low prices, or ease in with klittle bits. Not too keen on buying a chunk when just after a big runup in prices.

I don't really care about allocation issues.


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## Rusty O'Toole (Feb 1, 2012)

I have recently started a similar strategy (momentum stocks) and am up 17.3% in one month. Time will tell if this is a sound strategy or just a lucky month. The success started when I began paying as much attention to exits as to entrances.


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## lonewolf :) (Sep 13, 2016)

Near the end of bull markets breadth gets get thinner & thinner regarding stocks making new highs.

According to Bloom Burg Since 8000 in the Nasdaq 4 stocks account for nearly half the gains Amazon 240pts, Apple 173 pts, Alphabet 80 pts, Netflix 50 pts rest of Nasdaq make up 581 pts.

@ major market tops when euphoria is high it is the speculative stocks that top out last i.e., the Nasdaq prior to the Nasdaq it was the over the counter stocks that topped out last


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## twa2w (Mar 5, 2016)

I think the question to ask on this type of fund/ etf is how often do they screen or rebalance and what is hold/sell strategy..

It is often better to see these funds go through a full market cycle before committing a lot of money.


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## new dog (Jun 21, 2016)

This article is from 2014 and it suggests playing the momentum under the right conditions until the first sign of trouble like an earnings miss and then get out. You take a hit but you should be well ahead of any initial decline.

https://business.financialpost.com/investing/5-things-you-need-to-know-about-momentum-stocks

I suppose it depends on how the fund handles the portfolio turnover. Hard to say what it would do in a bear market when most stocks are dropping.


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## lonewolf :) (Sep 13, 2016)

Commodities often peak out @ max momentum as fear of a shortage causes panic buying.

Fear can be seen on the charts as crash in stocks & spike highs commodities


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## Pluto (Sep 12, 2013)

Incidently, one of the best momentum stocks right now is gsy.t. lots of earnings momentum and stock is only about 6.5 x's next years earnings so it is good value too. After p/e expansion, value won't be as good.


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## james4beach (Nov 15, 2012)

MTUM's top holding, AMZN at nearly 6% weight, has now exceeded $1 trillion market cap. This ETF has benefited hugely from overweighting AMZN during its amazing bull run.

This is what intrigues me. Can something like MTUM really hold insanely strong performers _during_ their run? I'm really curious.


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## Pluto (Sep 12, 2013)

I don't see why not. Its primarily a matter of holding stocks with above average relative strength, and above average revenue & earnings growth. So if AMZN's RS fell below average it would be dropped.


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## GoldStone (Mar 6, 2011)

twa2w said:


> It is often better to see these funds go through a full market cycle before committing a lot of money.


From 1994 to 2018, momentum factor outperformed S&P 500 by 1.5% annualized, but at the cost of much higher volatility.










Notice how Low Vol / Momentum barbell outperformed the other 3 strategies with lower volatility. You can easily implement the barbell strategy by splitting the funds 50/50 between MTUM and USMV.

Source:

The Case for A Low-Volatility - Momentum Barbell
http://www.fortunefinancialadvisors.com/blog/the-case-for-a-low-volatility-momentum-barbell


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## james4beach (Nov 15, 2012)

It's worth noting that MTUM has already rolled low volatility screening into its criteria, so this is not a pure momentum fund. It also seeks lower volatility holdings, which as per this research, appears to be a good idea.

Though I usually avoid fancy strategy ETFs, both ZLB (low vol) and MTUM (momentum + low vol) appear to have solid foundations and have shown good results so far in practice.


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## GoldStone (Mar 6, 2011)

Secondary screening for low volatility (after screening for momentum) is not the same as a pure low-vol strategy.

5 year price returns per Yahoo:

MTUM: 118%
USMV: 69%

I expect the gap will start closing once the current bull ends.

Annual rebalancing between momentum and low-vol is supposed to capture the excess returns before you give them back in the next cycle.


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## james4beach (Nov 15, 2012)

Thanks GoldStone, that's an interesting point. And I agree that things will get interesting when the current bull phase ends. I'm going to keep an eye on MTUM to see how it handles that transition.


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## doctrine (Sep 30, 2011)

This strategy will probably work until it doesn't. As mostly an individual stock picker, I can say that I've seen the results of this increasingly popular trading mechanism. Stocks that fail to make new highs or have an earnings miss get absolutely crushed when momentum players flee en masse. Like, sometimes down 20% in a single day or more. It's pretty crazy, but you just can't fight the tape. I feel like the end game will be that this gets even worse, so much so that most momentum players lose when the stock drops 50-75% in a day, wiping out all momentum games. There will have to be a lot of equity flight from these funds for it to stop happening. 

You can make a lot of money when these stocks bounce back, though, especially the ones that have strong underlying fundamentals. Once the short sellers move out though, they tend to come in after the momentum players have fled.


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## james4beach (Nov 15, 2012)

If you're saying that you think some of the largest weights in the broad indexes, such as AMZN/MSFT/JPM are at risk of plummeting 20% to 75% on single days, then we're going to have much bigger problems than just momentum strategies "failing". Rather, the entire S&P 500 will have to also plummet sharply due to so many of its largest weights being momentum stocks. The momentum stocks hammering down the index will drag all stocks with it.

But I think you're on to something. This would be an interesting theme to the next bear market. The S&P 500 has now had 10 positive years in a row. As soon as the top American momentum stocks go sour, perhaps this market selloff will be more intense than is generally expected.


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## james4beach (Nov 15, 2012)

Thought I'd mention MTUM again. Still seems to be doing great versus the index, basically by weighting the top performers in the S&P 500 a bit more heavily:


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## Spudd (Oct 11, 2011)

It looks like it's been mostly ahead of the index, but during the Covid crash it looks like it went almost as far down as the index. But it's bounced back much better. I suspect the volatility must be higher than the index. 

I recently bought ZXM.B which is an international momentum fund. Time will tell if that was a good idea.


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## depassp (Mar 22, 2020)

Ben Felix talked about Factors in 2018.

To be taken seriously, a factor should be:
-Persistent
-Pervasive
-Robust to alternative specifications
-Investable
-Sensible

In particular, he argued that the Momentum factor is neither Investable nor Sensible, with the following explanations:

Momentum factor is a _high-turnover_ strategy, making it *expensive* to implement in a portfolio

If there is no *sensible explanation* for a factor, it may not be expected to persist. He claims Momentum does not have a sensible explanation.


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## Pluto (Sep 12, 2013)

^
Yeah well, Ben has yet to explain why the cited momentum etf is outperforming the index. 
I think Ben ideas need to be critiqued more deeply.


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## james4beach (Nov 15, 2012)

depassp said:


> In particular, he argued that the Momentum factor is neither Investable nor Sensible, with the following explanations:
> 
> Momentum factor is a _high-turnover_ strategy, making it *expensive* to implement in a portfolio
> 
> If there is no *sensible explanation* for a factor, it may not be expected to persist. He claims Momentum does not have a sensible explanation.


I like Ben's stuff, but the problem here is that Ben assumes the market is very efficient and largely rational.

I don't think this is true. The reason momentum works is the the market is, in the medium term, a return-chasing, greed-based ponzi-like gambling market. It's a fundamental feature of the stock market and momentum truly captures that.

So the explanation is quite clear. The stock market is full of return-chasing and trend-riding participants. It has always been this way. There's a lot of irrationality there, and momentum embraces it (whereas the 'efficient market' people try to pretend the market is rational).

What I describe above is also why "technical analysis" works, yet is often dismissed by the rational market crowd. They say things like: the market is priced rationally and some trend lines can't tell you anything predictive. IMO this is incorrect. Because the market is irrational, and (in the short and medium term) _mostly driven by human psychology and herd behaviour_, technical analysis ... just like momentum investing ... has a lot of promise.

*The momentum factor taps into the fact that prices are somewhat driven by human emotion and crowd behaviour. But this is why it doesn't resonate with the rational investing / efficient market people. And I think Ben is right about 90% of the time, but he's also overly scientific about investing. He sounds like he believes the pseudoscientific stuff from academic market people. Notice how often he cites the Fama and French pricing model. This is a pseudoscience, but he might be taking it a bit too seriously.*

To be clear though, when you encounter someone who is 90% right about markets and investing, you should drop everything you're doing and listen to him.

Most of the stuff about value investing, fundamentals-driven market, highly quantitative models for pricing are a pseudoscience. It's not quite real and one should be careful to not take it too seriously. The stock market is, and has always been, a giant casino full of gamblers and crooks. Yes underneath all of that, there are fundamentals, and there is the "equity premium" and all that. But we should not forget that it's also full of gamblers, crooks, and market manipulators.

Momentum investing and T/A says: "ok, let's listen to what the irrational crowd and market manipulators are doing, and go with the flow, until prices demonstrate we should do something else"


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## Pluto (Sep 12, 2013)

The simplest pricing model I ever heard was the earnings per share model: If earnings per share goes up over time, the stock price will go up accordingly. 

I think if one looks at what's in the MTUM fund, I think one will find they overweight the stocks with higher eps growth as that is where the momentum comes from.


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## james4beach (Nov 15, 2012)

MTUM still winning versus the benchmark and a pretty huge difference for the trailing year. The 5 year annual returns are

S&P 500: 13.2%
MTUM: 17.4%


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## MrBlackhill (Jun 10, 2020)

Based on MSCI factor indices, Momentum and Quality have been outperformers in every country in the past 10 years, at least.









Factors – Elements of Performance


MSCI Factor Indexes help capture the return of factors which have historically shown excess market returns over the long run. MSCI provides factor indexes like quality index, minimum volatility index, momentum index, dividend yield index, low size index, enhanced value index.




www.msci.com





Below, about World (instead of USA)




























You can read more here https://www.msci.com/documents/1296...hure.pdf/b16eab4e-1dca-4b32-80e0-6645d7bd748a

It's also saying that:


> In practice, momentum is typically combined with value to gain diversification benefits, due to the low and often negative correlation between the two factors.


(But it seems like Value has been underperforming for the past 10 years, at least)


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## james4beach (Nov 15, 2012)

MTUM finished the year +29.9%, much better than the S&P 500 index at +18.4%

This thing has been a monster. It's been a powerful year for momentum... possibly due to central bank liquidity fuelling investor appetite for chasing returns in high-flyers.


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