Momentum ETF Bets $3.5 Billion on Tech Just as Trade War Resumes
Biggest Momentum Stock-Fund Just Shifted Back Into Tech Shares
(Bloomberg) -- An $8.7 billion exchange-traded fund that lets investors bet that the stock market’s winners will keep on winning just can’t catch a break.
The iShares Edge MSCI USA Momentum Factor ETF (ticker MTUM) pivoted back to technology shares -– a sector caught in the crosshairs of a U.S.-China trade war -- only a few months after reducing its stake in these companies and missing a 10% rally. The fund’s tech weighting went to 40% from 18%, while another globally-geared sector -- industrials -- saw material additions, going to 10% from 3%. Meanwhile, the ETF cut its exposure to health-care stocks to 12% from 31%; this sector has lost more than 2% since the fund last rebalanced but has recently outperformed.
A net 13 tech stocks were added, while 13 health-care stocks were removed, according to Bloomberg Intelligence ETF analyst Athanasios Psarofagis. The likes of Johnson & Johnson, Pfizer Inc. and WalMart Inc. were among the most-notable names expunged from the fund, while new members include Nasdaq 100 constituents Broadcom Inc. and Mondelez International Inc.
“Oh man, MTUM just rebalanced and is now back to being a tech-heavy fund, just as tech sells off after a rally which MTUM missed due to an ad hoc rebalance, which had it looking like a low-vol fund,’’ said Eric Balchunas, senior ETF analyst for Bloomberg Intelligence.
Indeed, the correlation between MTUM and a low-volatility iShares ETF (ticker USMV) has stayed unusually high for all of 2019, Psarofagis observed.
The fund’s previous ad hoc rebalance in January more than halved its exposure to technology and communications sectors, the latter of which is home to three of four FANG stocks -- none of which are held by MTUM. Health care was the big beneficiary of the shuffle.
The January rebalance proved to be a hindrance to MTUM’s returns for much of the year. Through May 3, the investment product lagged the S&P 500’s year-to-date advance by 2.7 percentage points. However, the fund’s previously defensive characteristics have been a boon amid the re-escalation of the trade war, as its drawdown of 2.1% since then is less severe than the 5.5% blow delivered to the benchmark U.S. stock index, leaving it in better shape on the year. Meanwhile, the tech sector ETF (ticker XLK) is down 7.9% from record highs, a more precipitous drawdown than the S&P 500’s.
To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Rita Nazareth
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