Biggest Momentum ETF Late to Nvidia Party

The iShares MSCI USA Momentum ETF (MTUM), the biggest momentum ETF, has rebalanced and now has Nvidia as the biggest holding in its portfolio at around 6.3%. However, the fund only rebalances twice a year, meaning it is late to the party for the AI stock.

MTUM Performance Struggles

According to FactSet data, MTUM did not even have Nvidia in its portfolio before May, while having large weights in underperforming energy stocks such as ExxonMobil and Chevron. The fund has lost 5.7% on a total return basis in 2023.

Time Sensitivity of Momentum

“Momentum is very time sensitive,” said Strategas ETF strategist Todd Sohn. “With momentum, because you are buying the stocks that are up the most, if you do it at a random time, there is huge risk you miss out on a large chunk of a move or you’re holding on to losers way too late.”

Index Methodology

The MSCI USA Momentum Index attempts to capture hot stocks, with the hope their rally will continue over the coming months. The index uses a combination of six- and 12-month price momentum metrics to create a momentum score for stocks. The MSCI USA Momentum Index is rebalanced every six months, with the most recent update taking effect June 1.

The MTUM fund follows a slightly altered version of the index that rebalances over the course of several days ahead of the effective date. MSCI researchers Abhishek Gupta and Roman Mendoza said in a May 23 note the momentum index saw a larger-than-average turnover this time, at 67%. Nvidia, Meta Platforms and Microsoft were all added to the index with a 5% weight, which is the maximum amount allowed by the methodology.

There are other momentum funds with different methodologies that rebalance more frequently, such as the Invesco DWA Momentum ETF (PDP) and the Alpha Architect U.S. Quantitative Momentum ETF (QMOM), which have outperformed MTUM this year, but those two funds are still trailing the S&P 500.

With stocks still trying to pull out of a bear market, this may not be the best environment for momentum, according to Strategas’ Sohn. “The broader market does matter to some extent. When you have a strong bull market, like a 2013 or even a 2016-17, that’s when momentum really works well because people are just buying stocks left and right. This is a little bit more tricky,” Sohn said.