This ETF Outperformed the S&P 500 with Its Factor-Based Strategy

In 2024, the iShares MSCI USA Momentum Factor ETF (MTUM) outperformed the S&P 500 with its momentum strategy, highlighting how a well-structured yet passive quantitative approach can deliver superior returns relative to the benchmark index.

This raises several key questions: Has this performance come with increased risk? And can this profit-generating factor persist in the years ahead?

MTUM ETF Technical Details

The ETF trades under the ticker MTUM, with ISIN US46434V6213, and is issued by BlackRock. It tracks the MSCI USA Momentum Index, leveraging the momentum factor to construct its portfolio.

Rebalancing occurs semi-annually, with a management fee of 0.15%. Currently, the fund manages over $16 billion in assets. Its sector allocation is heavily weighted toward technology (32%), followed by financials (25%), consumer discretionary (15%), healthcare (12%), and industrials (10%).

Beyond these technical aspects, what caught the financial world’s attention was its impressive 2024 performance of 32.89%, surpassing the S&P 500’s 27% gain.

Momentum Strategy: How It Works

The ETF follows a "momentum" strategy:

Momentum investing involves selecting stocks that have demonstrated strong relative performance in recent months, based on the assumption that these trends can persist in the short to medium term. The MSCI USA Momentum Index identifies stocks with the highest risk-adjusted returns over a 6-to-12-month period, rebalancing every six months.

This strategy capitalizes on price inertia, exploiting investor behavior that favors buying rising stocks and selling declining ones. However, not all that glitters is gold—momentum can experience sharp reversals, particularly during periods of market turbulence. So, does this strategy carry significant risk despite its strong performance?

Momentum and Risk: The Case of Financials in 2024

In 2024, MTUM significantly increased its exposure to the financial sector, reducing its allocation to high-volatility technology stocks such as Nvidia and Meta, which dominate the S&P 500. This shift was driven by the sector’s strong momentum, fueled by persistently high interest rates and rising earnings.

Does this heavy allocation to financials introduce additional risk compared to the S&P 500? Traditionally, increasing exposure to financials does not heighten portfolio risk; in fact, it often reduces it. Banking stocks tend to be more conservative and less prone to extreme price swings than tech stocks, which make up a substantial portion of the S&P 500.

Additionally, financials exhibit lower correlation with short-term interest rate fluctuations, making them less vulnerable than the tech sector, which is highly sensitive to changes in financing costs. Their resilience to economic cycles—particularly within systemic banking and asset management—provides further long-term stability.

As a result, MTUM has benefited from financials’ rising returns, whereas the S&P 500, with its 30%+ exposure to tech, has experienced greater volatility.

Limitations of the Momentum Strategy

While the momentum approach has proven profitable, it carries inherent risks. The ETF’s portfolio is often highly concentrated, with its top 50 holdings accounting for more than 50% of total assets. If momentum shifts rapidly, the fund may be forced to sell underperforming positions at unfavorable prices.

Additionally, heavy exposure to cyclical sectors can result in more pronounced drawdowns than the S&P 500 during recessions or financial turmoil. Unlike the S&P 500, which maintains a capitalization-weighted structure, MTUM is subject to sudden sector rotations, potentially increasing its volatility.

Technical and Fundamental Analysis: Are They Relevant for MTUM?

Technical and fundamental analysis have limited applicability to MTUM, as its composition changes with each semi-annual rebalancing. Any macroeconomic or technical outlook formed today may become obsolete in a few months due to the ETF’s shifting holdings.

Unlike the S&P 500, where supply and demand dynamics impact individual stock prices, MTUM follows a pure momentum strategy—eliminating the need for traditional stock picking and market timing.

Interestingly, while MTUM is currently at all-time highs, signaling strong bullish momentum, this does not necessarily imply an imminent correction. Profit-taking may not be justified, given that the ETF’s composition is set to update soon. At present, MTUM’s market value is supported by its allocations to financials and industrials, but this could change in the near future.

Conclusion

The iShares MSCI USA Momentum Factor ETF has demonstrated that factor-based investing can outperform the S&P 500 in certain market environments. Its selective exposure has resulted in lower volatility than traditional market-cap-weighted ETFs, but its high concentration introduces potential vulnerabilities during periods of instability.

As long as market conditions continue to favor momentum investing—characteristic of bullish phases—the ETF stands a strong chance of maintaining competitive returns. However, a sharp market reversal, driven by structural or economic shifts, could significantly impact MTUM’s performance—at least until its next rebalancing.

Original article published on Money.it Italy 2025-02-19 19:44:00. Original title: Questo ETF ha battuto l’S&P 500 grazie al suo elemento fattoriale