Moving To Momentum With ETFs

Markets Benzinga

Of the more than 280 exchange traded products that debuted in the US last year, plenty were multi-factor funds. But with the momentum factor excelling last year and investors hoping for more of the same in 2016, investors may want to consider exchange traded funds that are dedicated plays on the momentum factor.

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Investors looking for seasoned ETFs that emphasize the momentum factor have some worthy choices in the forms of the $1.88 billion PowerShares DWA Momentum Portfolio (PDP) and the $1.07 billion iShares MSCI USA Momentum Factor ETF (MTUM).

PDP, which turns eight years old in early March, follows the Dorsey Wright Technical Leaders Index (DWA Technical Leaders Index), a benchmark that adheres to the Dorsey Wright relative strength methodology. Consumer discretionary, industrial and healthcare names combine for over 53 percent of the ETF's weight.

"PDP was more diversified at the sector level than MTUM, with less exposure to the top-performers of 2015 and more toward the laggards. PDP is reconstituted and rebalanced on a quarterly basis using a proprietary screening methodology that starts with stocks within the NASDAQ US Benchmark index," said S&P Capital IQ in a new research note.

Top 10 holdings in PDP include familiar momentum names such as Apple Inc. (AAPL), Gilead Sciences, Inc. (GILD) and Priceline Group Inc. (PCLN). Apple is the ETF's largest holding with a weight of 2.87 percent.

With both MTUM and PDP, investors should make a habit of checking the ETFs' rosters because although neither is actively managed, holdings frequently change in these funds.

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"We think both PDP and MTUM need to be regularly monitored to understand their exposures as turnover rates were 73% and 106%, respectively. Neither paid out a capital gain in 2015," said S&P Capital IQ.

MTUM follows the MSCI USA Momentum Index and holds 124 stocks. The ETF is discretionary and tech heavy as those sectors combine for over 54 percent of the fund's weight. Amazon.com, Inc. (AMZN) and Facebook Inc(FB) are MTUM's top two holdings, combining for 9.5 percent of the ETF's weight.

"Meanwhile, energy, materials and utilities shares made up a combined 2% of assets, well below the 12% in the S&P 500 index. MTUM trades approximately 270,000 shares on a daily basis. The ETF has a low 0.15 percent expense ratio. The MSCI index behind MTUM's construction is generally rebalanced on a semi-annual basis, using six and 12-month risk-adjusted momentum criteria. However, the index can undergo 'conditional ad-hoc rebalancing' based on changes in monthly volatility measures if triggers are hit, according to MSCI," said S&P Capital IQ.

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