The report, titled Will the Top Momentum ETF Be Receiving An Energy Boost?, said the $617m iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMF) and $17.4bn iShares MSCI USA Momentum Factor ETF (MTUM) could see drastic changes, with previously languishing sectors displaying strong performance since the last rebalance at the end of May.
Following the last reweighting, the strategies have a 31% weighting to financials, up from 1.5% in April, and a 13% allocation to industrials, rising from 7.6%.
Meanwhile, its allocations to the information technology and consumer discretionary sectors fell from 42% and 20% to 17% and 14%, respectively.
Unfortunately, IUMF and MTUM have only 2.1% and 0.4% weightings to energy and real estate which have been among the strongest performers over the last half year.
To rectify this underweighting, CFRA has forecasted BlackRock’s factor ETFs to introduce new large-cap additions from each sector, including ConocoPhillips and ExxonMobil for energy and Simon Property Group, Kimco Realty and Regency Centers for real estate.
Meanwhile, the relative weakness of consumer discretionary could see the ETFs reverse their previous allocation boost to Berkshire Hathaway, while CFRA predicts other cuts to the weightings of PayPal and Disney.
Optimistic on the reshuffle, Todd Rosenbluth, head of ETF and mutual fund research at CFRA, commented: “CFRA has buy recommendations on ConocoPhillips, ExxonMobil and other large cap energy stocks.
“We believe the fundamentals remain strong and investor sentiment will be a tailwind. A strong macroeconomic environment is favourable for energy stocks.”
CFRA noted IUMF and MTUM rebalance on a half-yearly basis, taking its parent index – the MSCI USA index – and then focusing on six and twelve-month performance records, and then price performance one month prior to a rebalance date.
Basket weightings are based on a combination of market cap weighting and momentum score, with high turnover to be expected even despite MSCI’s buffer rules to limit semi-annual changes.
“IUMF is passively managed in an effort to reduce true over and provide exposure to the momentum factor,” Rosenbluth added. “A more aggressive approach would result in more whiplash for investors. I do not expect BlackRock to make changes or use a more actively adjusted index approach.”
Not convinced by this approach, Herb Blank, senior consultant at Global Finesse, said the six-month rebalance of the momentum factor strategy is “subject to decay”.
“For a factor that changes as quickly as momentum in today's real-time marketplace, I believe six-month rebalancing is too long a period and would counsel changing it to quarterly,” Blank cautioned.
Offering support for this, IUMF and MTUM’s last rebalance saw the ETFs perform a drastic swing in favour from growth to cyclical stocks, some six months after Pfizer’s positive vaccine results commenced the cyclicals comeback.
The May rebalance then saw the products increase their weighting to JP Morgan and Berkshire Hathaway, after the companies rallied 96.7% and 69.4% between peak pandemic volatility last March and the end of May this year. Following the rebalance and 8 November, the two stocks returned 3.5% and 0.2%, respectively.
At risk of repeating this action of buying into a trade late, ConocoPhillips rallied 131.8% over the last 12 months, while Simon Property Group and ExxonMobil returned 121.6% and 78.9% over the same period – all prior to their potential entries into IUMF and MTUM.
Mixed message from investors
Not seeing these potential issues as having a material impact, Rosenbluth noted both BlackRock US momentum ETFs have outperformed the Invesco US Momentum ETF (SPMO) over the last one and three years, despite SPMO’s quarterly rebalance methodology.
Importantly, though, IUMF and MTUM have returned 19.9% and 20.7% since the start of the year, behind the 26.9% yielded by the S&P 500. This illustrates the smart beta products have failed to achieve alpha so far in 2021.
Despite this, Rosenbluth said MTUM remains the most popular momentum strategy, gathering $1.6bn in new money since the turn of the year.
Unfortunately, European investors have been less convinced, with IUMF shedding $355m assets year-to-date.
Have you seen our new ETF data tool?
Just click on any of the ETF links in the article above and you will get access to a whole host of data including:
- Historical Performance
- Sector and country weights
- Portfolio analysis
- Similar ETFs